As part of the overall strategic plan and reevaluation of how inspections of public company audits are planned, conducted, and reported on, the PCAOB has released its objectives and potential focus areas for planned 2019 inspections of issuers and brokers and dealers. We encourage audit committees, management and auditors to review this alert and BDO’s insights along with our related alert on the PCAOB’s Five Year Strategic Plan.

BACKGROUND

In early December 2018, the PCAOB issued an Outlook on its objectives and potential focus areas for planned 2019 inspections of audits of issuers and brokers and dealers. This Outlook outlines ongoing inspections transformation efforts and provides an overview of various areas of inspection focus for 2019 to be aware of in consideration of ever enhancing audit quality initiatives to bolster the capital markets.

PCAOB TRANSFORMATION OF INSPECTION APPROACH

The PCAOB recently approved and announced its five year strategic plan and further outlined its approach to evaluating and transforming its audit inspection process. The PCAOB has placed significant emphasis on driving finding rates down through cultivation of strong preventative controls within firms’ systems of quality controls. As such, the 2019 inspection process will include the PCAOB’s consideration of topics such as the procedures inspection teams perform on the review of specific audit engagements and a deeper focus on audit firm systems of quality control, the approach to selecting engagements for inspection and areas of inspection focus, and how and what the PCAOB communicates about such inspections. The PCAOB is further considering how to make the process forward-looking and how to more effectively consider evolving risks, environmental factors, and the changing needs of stakeholders. Many of these projects are noted as being long-term in nature, with the expectation that certain other projects are to have an effect on the 2019 inspections cycle.

BDO is supportive of this approach and will continue to align with and incorporate these areas of emphasis within our own efforts to advance audit quality. We share our thoughts below with respect to certain of the evolving areas of the PCAOB’s announced focus and the impact we anticipate for audit committees and management of our issuer clients as well as for our engagement team professionals.

KEY AREAS OF INSPECTION FOCUS

The PCAOB has indicated the following potential areas of focus for inspections performed in 2019 which we shall explore further:

Audit Firms’ Systems of Quality Control

Independence

Recurring Inspection Deficiencies

External Considerations

Cybersecurity Risks

Software Audit Tools

Digital Assets

Audit Quality Indicators

Changes in the Auditor’s Report

Implementation of New Accounting Standards

Audit Firms’ Systems of Quality Control – The PCAOB intends to perform a deep dive into the design and operating effectiveness of such systems and how these promote an audit firm’s culture of audit quality and responsiveness to risks, scoping in the organization’s structure, complexity of firm practices, and the knowledge and experience of its professionals. Critical processes to be reviewed in depth include engagement acceptance and continuance decisions, firms’ internal audit monitoring programs, engagement performance and management of staff. Additionally, this area of focus will expand understanding of whether or not firms design policies and perform audit procedures to evaluate whether their issuer clients are establishing and maintaining appropriate codes of conduct and compliance programs related to fraud, bribery, corruption, and other violations of law, including inadvertent violations that may have a direct and material effect on financial statements.

BDO Insight:

While not a new area of review, the PCAOB has signaled to audit firms during the 2018 inspection process as well as in public speeches, including a recent speech1 made by PCAOB Board member, Kathleen Hamm, that audit firm quality control is a vital aspect of effective corporate governance in ensuring the performance of better audits. For the past several years, the percentage of audit deficiencies for the largest audit firms has remained plateaued at a rate that the PCAOB finds unacceptable. In response, the PCAOB is raising the bar through focusing on a combination of prevention, detection, and deterrence of audit deficiencies before audit reports are issued and relied upon. The fourth leg of that stool is enforcement of regulations through disciplinary actions when warranted.

As further perspective, the PCAOB has created a new senior position – Quality Control Leader – to coordinate initiatives around quality control across all inspection programs and identify insights to be shared with the marketplace. Specifically, the PCAOB will be intent on understanding where audit firms may have opportunities to enhance the design and implementation of their control protocols across several inter-related areas:

The PCAOB selection approach will continue to be risk-based taking into account the size, complexity, and risk profile of audit firms, including past inspection results, identified weaknesses, as well as known changes in controls.

The PCAOB will consider the control and governance environment and tone at the top along with processes audit firms have in place to cascade audit quality down through its professionals and to further self-identify and assess particular risks they face to delivering PCAOB compliant audits. PCAOB inspection team assessments will help inform how firms identify timely negative audit quality and prevent “risky” audit behavior and activities. This information, in turn, would then be used to help in selection of individual audit files as well as focused areas for review within those files and remediation determinations.

The gathering of firm-level audit quality indicators (AQIs) firms use in planning, managing, and monitoring audit work, and deploying their professionals. This includes AQIs that firms share with audit committees. This signals a revised interest in AQIs,2 outside of the PCAOB simply monitoring developments in this area. Refer to further information below.

Audit firms’ responsiveness to emerging and disruptive technologies and their impacts on audit methodologies, systems, and policies and overall audit quality.

Concurrent with the inspection focus is a multidisciplinary approach to assessing existing PCAOB quality control standards that will further be informed through active discussions with the PCAOB’s Investor Advisory Group as well as the Standard Advisory Group. The objective is to enhance current standards to incorporate a risk-informed and integrated approach, incorporate how auditor professional ethics and values are reinforced through quality controls, along with consideration of changing audit practices. The latter includes such things as the increasing use of audit firm shared service centers, evolving approach to internal controls, or emerging risk management methodologies (e.g., COSO). Ultimately, the goal is for such standards to be both universally acceptable while being scalable for both small and large firms.

BDO continues to engage in discussions with the PCAOB and is monitoring effects and enhancements to our audit processes and our firm system of quality control to reinforce audit quality and the services we are providing to our clients and to increase the confidence of the capital markets more broadly.

Independence – Recognizing that independence contributes to public trust in the quality of audit services, the PCAOB intends to assess audit firm independence preventative controls, compliance with and knowledge of independence rules, and the impact on independence of non-audit services.

BDO Insight:

Audit firms, including BDO, each have significant departments of professionals who oversee the daily compliance activities regarding independence requirements. Firms that have robust policies, procedures and reporting mechanisms to ensure independence in both fact and appearance will better serve the overall goal of ensuring audit quality. Increasingly complex and changing relationships within client business structures and the need for evolving systems and continual communication with clients that enable timely tracking are very important. In addition, having dynamic standard setting along with regulations regarding non-audit services that are responsive to both the need for independence along with required business, industry, and technical knowledge that audit firms draw on within their specialty practices across their firms can further help achieve audit quality objectives. We encourage audit committees, management and auditors to have robust dialogues and procedures around independence that occur throughout the audit cycle. Refer here for more on BDO’s focus on independence.

Recurring Inspection Deficiencies – Review of the remedial actions that firms are taking in response to previous inspection findings and consideration of the timing and progress of audit firm work, tools and techniques used to identify and define root causes of deficiency findings and the action steps and monitoring mechanisms firms deploy to address and prevent recurring deficiencies. Audit finding themes continue to include deficiencies in auditing internal control over financial reporting, revenue recognition, allowance for loan losses, and other accounting estimates, including fair value measurements (e.g., goodwill and intangible assets) along with deficiencies related to assessing and responding to identified risks of material misstatement.

BDO Insight:

Developing a deep understanding of the causes of recurring matters is essential to employing effective actions to eliminate those matters; therefore, the PCAOB is interested in the methods firms use to design and implement effective actions. The PCAOB provides supplemental guidance within Staff Inspection Briefs as well as its Annual Report on Inspections of Brokers and Dealers for your reference. Additionally, we provide continuing educational opportunities and encourage attendance by our clients and require attendance by our professionals. Such events, along with additional thought leadership publications, tools and practice aids, are accessible via BDO’s Center for Corporate Governance and Financial Reporting. For more on BDO and the PCAOB inspection process, refer here.

External Considerations – External factors that impact the risk of material misstatements stem from a variety of sources and may emerge during the course of the period under audit. As such, the PCAOB reminds us that an auditor’s risk assessment procedures should be continuous throughout the audit. Inspection procedures will consider evaluating firms’ responses to elevated risks of material misstatement due to external considerations, including assessing how firms adjust the nature, timing, and extent of their audit procedures. Additionally, the PCAOB will assess firms’ evaluation of audit evidence, including consideration of evidence obtained through external sources, such as industry or economic data that potentially contradicts management assertions.

BDO Insight:

As part of BDO’s Statement of Audit Quality Intent, we consider how external factors impact our delivery of audit quality across our systemic audit strategy built around innovating future audits, responsiveness to the market, developing our professionals, leading by accountability and the control environment that determine and monitor the actions we take to drive audit quality. The external factors we consider as we execute on our audit strategy and intent stem from the business environments our clients operate in, corporate governance structures, competitive forces, the regulatory environment, sustainability and innovative disruptions, investor and shareholder expectations, as well as accounting and reporting complexities.

Cybersecurity Risks – Cyber risk and the evolving complexity relative to incidents and breaches of information systems remain at the forefront of risk assessment and the potential for material misstatement to companies’ financial statements.

Software Audit Tools – As firms continue to develop and use software audit tools, including the increasing incorporation of analytical tools, artificial intelligence, etc., the PCAOB intends to monitor whether the firms are effectively using these tools and applying appropriate due care and professional skepticism when they do.

BDO Insight:
As with many audit firms, BDO continues to deploy significant resources to exploring and deploying software to make our audits more effective and efficient and be responsive to complexities in client transactions. As part of this innovation to the audit, we assess new or changes to existing policies and procedures when developing and utilizing such to ensure adherence to professional standards. For more on what BDO is doing with respect to audit innovation refer to BDO’s Innovating Future Audits.

Digital Assets – Similar to the monitoring of software audit tools, the PCAOB will evaluate auditors’ responses to risks associated with digital assets (e.g., cryptocurrencies, initial coin offerings, and uses of distributed ledger technology such as block chain). This includes consideration of audit firm independence, client acceptance and retention decisions, resource management, and planned audit procedures.

BDO Insight:
We are continuing to develop resources in assessing risk management strategies in the auditing of digital assets, as well as producing certain thought leadership and continuing education in the form of in-person events and programming discussing the impacts of these evolving risk areas. For more information, refer to BDO’s Innovating Future Audits.

Audit Quality Indicators (AQIs) – As indicated above, the PCAOB plans to consider how firms may be using AQIs to monitor their audit work and assignment of staff and whether such AQIs are being discussed with audit committees. The PCAOB has further signaled it is looking to collaborate further with those who collect data and conduct research on the quality of audits to develop more thought leadership around AQIs.

BDO Insight:
By way of example, the Center for Audit Quality (CAQ), in conjunction with the larger audit firms including BDO, is continuing its work on audit quality indicators4 and disclosures and continues to gather insight and perspective from the auditing profession through its working group and monitoring of evolving, voluntary audit quality reports being produced annually by many auditing firms, including BDO.5 The work being promoted by the CAQ builds upon previous thought leadership and stakeholder engagement performed to better understand the needs and expectations around AQIs.

Changes in the Auditor’s Report – In addition to changes to basic elements of the auditor’s report effective in 2017, the PCAOB Auditing Standard 3101 (AS 3101) will feature adoption of the disclosure of critical audit matters (CAM) within the auditor’s report for issuers beginning with larger accelerated filers for audits of fiscal years ending on or after June 30, 2019 and for other issuers for audits of fiscal years ending on or after December 15, 2020.6 The PCAOB, along with the SEC, is particularly interested in monitoring the results from “dry runs” the firms and their issuer clients are engaged in currently to aid in the implementation of this new and comprehensive standard and understanding unintended consequences or challenges that may result from adoption of this standard.

BDO Insight:
We, along with other larger audit firms, are conducting dry runs to better inform both our clients and our professionals about the implementation process for CAM reporting and help in the design of processes, policies, procedures and tools to convey required information within our auditor reports. We are sharing these experiences with clients, regulators, as well as through our work with the CAQ. This further includes preparing ongoing thought leadership and educational opportunities to support our clients and engagement teams and to be made broadly available as part of our related and evolving resources. Additionally, the CAQ has timely released Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example as a practical tool to share early observations from dry runs—observations that should be valuable for audit committees, investors, auditors, and others in the financial reporting ecosystem. It also provides key questions—derived from the dry run experiences to date—that audit committees and others should consider, along with an illustrative example of a CAM communication.

Implementation of New Accounting Standards – With the implementation of significant accounting standards that are effective (revenue recognition), are soon to be effective (leases), or will be effective in the near future (financial instrument accounting and expected credit losses), the PCAOB is focused on changes in firms’ auditing processes and procedures including both the implementation and disclosures of these new and significant standards. Emphasis will be placed on areas that require management judgment and how auditors have addressed related internal controls for both the implementation period and the post-implementation accounting and disclosure periods. This further includes review of auditors’ independence processes with respect to providing assistance to companies as they implement the standards. Additionally, the PCAOB is mindful and will continue to monitor impacts on evolving auditing standards – for example the pending PCAOB standard on Auditing Accounting Estimates, including Fair Value Measurements.

BDO Insight:
BDO continues to provide a significant amount of thought leadership and guidance in these areas to our professionals and to our clients – both from management’s and the audit committees’ perspectives. Be on the lookout for our yearend reviews of Accounting, SEC Matters and our Audit Committee In Focus publications to be posted to our BDO Center for Corporate Governance and Financial Reporting.

NEXT STEPS

We encourage audit committees, management and our audit professionals to remain abreast of the PCAOB’s focus and communications. BDO will continue to provide thought leadership and educational opportunities in this regard. For more information on how BDO is delivering on our audit quality intent, we encourage you to review our most recent voluntary Audit Quality Report and speak to your engagement team leaders with any questions you may have.CONTACT:

Summary

The FASB issued ASU 2018-19[1] to defer the implementation date of the new credit loss standard for nonpublic entities by one year, and clarify that operating lease receivables are not within its scope. Rather, operating lease receivables will be tested for impairment under Topic 842, Leases. The ASU is available here, and is effective at the same time as the new standard for credit losses.[2]

Background and Main Provisions

Transition and Effective Date for Nonpublic Business Entities
As originally issued, the new credit loss standard is effective for nonpublic business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. However, the transition guidance in that ASU requires an entity to make a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the amendments are effective, which would be January 1, 2021, for calendar year-end nonpublic business entities. This ASU defers the adoption date for nonpublic business entities by one year to fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This also aligns the effective date for their annual financial statements with that of their interim financial statements.

Operating Lease Receivables
The scope of the new credit loss standard, codified in ASC 326-20, does not specifically address receivables arising from operating leases; however, they appear to meet the definition of financial assets in scope of ASC 326-20. The ASU clarifies that operating lease receivables accounted for by a lessor in accordance with the new leasing guidance in Topic 842 are not in the scope of ASC 326-20. Instead, impairment of receivables from operating leases should be accounted for in accordance with Topic 842, Leases.

Effective Date and Transition Requirements

The effective date and transition requirements for this ASU are the same as ASU 2016-13.CONTACT:

]]>Tue, 18 Dec 2018 05:00:00 GMT47f22416-e9b6-4ee3-bcb8-582883c990c5PCAOB’s five-year strategic plan provides a blue print for how the new leadership at the PCAOB is increasing the organization’s focus on understanding and designing activities and standard-setting that take into account the interplay of audit quality, stakeholder perspectives, embracing emerging technology impacts on financial reporting and inspections, and a shift toward deficiency prevention by putting emphasis on audit firms’ quality control processes and considering changes to how deficiencies are communicated to the market. We encourage you to read the plan and consider BDO’s insights shared below.

PCAOB Transformation and Strategic Plan
The Public Company Accounting Oversight Board (PCAOB) is in a period of transformation, making changes to how it inspects accounting firms and interacts with stakeholders. These changes are detailed in the PCAOB’s strategic plan for 2018-2022, approved on November 15, 2018 in an open meeting.

For the first time in 15 years, the PCAOB has an entirely new slate of board members. According to board member Kathleen Hamm, the SEC has tasked the new board with assessing the PCAOB’s activities and operations and determine a new strategic direction. The overall goal of the strategic plan is to drive continuous improvement in audit quality and improve communication with investors, audit committees, preparers, and other stakeholders, while transforming into a more “agile, innovative, regulator.”

The five areas of focus in the strategic plan include:

Drive improvement in the quality of audit services through a combination of prevention, detection, deterrence, and remediation.

Anticipate and respond to the changing environment, including emerging technologies and related risks and opportunities.

Pursue operational excellence through efficient and effective use of our resources, information, and technology.

Develop, empower, and reward our people to achieve our shared goals.

To start with adherence to the goal of collaboration and transparency, the PCAOB was assisted by a consultant in developing their strategic plan and utilized outreach and surveys to develop the plan. The draft was open for public comment prior to being finalized. The PCAOB also plans to conduct more outreach to financial statement preparers and other stakeholders and to be “more open with respect to our operations and with respect to the information that we collect and produce.” The focus on communication with financial statement preparers is a key change meant to break down the former “walls” that the PCAOB is only of concern to auditors. There also seems to be a shift by the PCAOB to focus on best practices of audit firms. As an audit firm, we have noticed a significant shift toward a more “open door” policy with respect to the frequency and quality of conversations with the PCAOB occurring throughout the year about audit quality drivers and indicators which has increased the communications and enforced a feedback loop with the audit profession.

Another significant emphasis noted in the PCAOB strategic plan includes a shift from focus only on audit deficiencies observed to a more “forward-looking and balanced” approach that looks at prevention. What this likely means for audit firms is more focus during PCAOB inspections on firm quality control processes and monitoring procedures from a top-down approach, which includes the use of and supervision of other audit firms within the scope of an audit.

The strategic plan also addresses a change in inspection reports, including improved clarity, timeliness and relevance. As a firm, BDO notes acceleration of inspections timing and improved timing of PCAOB’s findings reporting at a firm level. We anticipate this expedited timing to continue.

Some other changes we expect to see as a result of the new plan is more focus by the PCAOB on firms’ use of technology, such as data analytics and artificial intelligence, not only in their inspections but also in use by the PCAOB as they advance technology usage in their own inspections. We further expect increased interest from the PCAOB in our expanding use of data analytics as audit tools and as used in our own assessment of firm-level audit quality.

Finally, the strategic plan indicates that the PCAOB intends to better leverage economic and risk analysis of standards by incorporating data from their oversight activities and performing post-implementation reviews of new or amended auditing standards. Auditors, management and audit committees should be further contemplating the increased pace of significant standard-setting[1] and the strategic and operational impacts that these will have on the financial reporting process and be involved in both dry run and post-implementation sharing of knowledge to better inform the PCAOB on additional needed guidance in implementation or on unintended consequences of stand-setting.

You can view a copy of the strategic plan here and recording of the open meeting here.

]]>Thu, 13 Dec 2018 05:00:00 GMT5ee5c9f1-3044-491c-91d0-127c7b062cc5data from the Bureau of Labor Statistics show. That percentage drops to 46 percent for companies with fewer than 100 employees. To expand access and offer a more efficient retirement plan to small businesses, the Department of Labor (DOL) has proposed a rule that would expand the definition of a pooled strategy called association retirement plans.

While the proposal refers to them as “association retirement plans,” these types of retirement plans are better known as multiple employer plans (MEPs). They are currently only available to an employee organization or certain employers in the same industry.

The rule, proposed in late October 2018, would expand the MEP definition, currently found in section 3(5) of the Employee Retirement Income Security Act (ERISA). The proposal would allow unaffiliated businesses in various industries, but with common economic interests, to join together and create a retirement plan for all employees under a single administrator. The rule, if finalized, would also allow businesses that are within certain geographic conditions to create a MEP.

Currently, small businesses are often discouraged by the cost and complexity of offering a retirement plan, U.S. Secretary of Labor Alexander Acosta said when announcing the proposal. The new rule would expand opportunities for employers to offer options to the 38 million private-sector employees who don’t have access to a retirement plan at work.

The proposal comes after President Donald Trump’s Aug. 31, 2018, executive order 13847, Strengthening Retirement Security in America. This order directed the DOL and Treasury Department to look for ways to help employers sponsor retirement plans. While Treasury has not issued any proposals at this time, it is expected that the department will issue guidance within 180 days of the order.

At a time of increasing interest in enhanced nonfinancial disclosures, the Sustainability Accounting Standards Board issued codified accounting and reporting standards applicable to 77 identified industries as a market-driven response to satisfy the need for sustainability information focused on financially material issues that are decision-useful for investors and key stakeholders and cost-effective for public companies. Corporate boards are encouraged to consider the potential benefits that come with providing more complete public information about a company’s risks and opportunities.

In November 2018, the Sustainability Accounting Standards Boards (SASB) issued codified sustainability standards applicable across 77 industries following six years of development, leveraging evidence-based research and broad stakeholder input. While the SASB is not an authoritative standard setting body and use of such standards is not required, SASB standards are intended as a guide for voluntary reporting use by public companies in making disclosures on material sustainability factors in Forms 10-K, 20-F, and 40-F as required by existing U.S. regulation. SASB standards may also be applicable to the disclosure of material sustainability information by other types of organizations including privately held corporations and foreign corporations publicly listed in other jurisdictions.

The SASB defines “sustainability” as corporate activities that maintain or enhance the ability of the company to create value over the short, medium, and long term. Sustainability accounting reflects the governance and management of a company’s environmental and social impacts arising from production of goods and services, as well as its governance and management of the environment and social capitals necessary to create value over time. Additionally, the SABS refers to sustainability as “ESG” (environmental, social, and governance), though traditional corporate governance issues such as board composition are not included within the scope of the SASB’s standard-setting activities. The SASB contends that “investors want to better understand not only how companies impact the environment, but also how climate change and other factors will impact companies – and which companies are taking smart steps to reduce risk and increase returns.”[1]

The creation of such standards represent a market-driven response to the need for sustainability information that is decision-useful for investors and interested stakeholders and cost-effective for issuers that revolves around identified financially material issues that are reasonably likely to impact the financial condition or operating performance of a company. Based upon its nonfinancial nature, sustainability information is typically not subject to generally accepted accounting standards and thus, does not fall under U.S. generally accepted auditing standards, procedures, and judgments and is not subject to the rigor of internal controls that are considered in the construct of financial statements[2].

What are the SASB standards?
The industry-specific standards, which span 11 industry sectors, include:

Disclosure topics – A minimum set of industry-specific disclosure topics reasonably likely to constitute material information, and a brief description of how management or mismanagement of each topic may affect value creation.

Accounting metrics – A set of quantitative and/or qualitative accounting metrics intended to measure performance on each topic.

Technical protocols – Each accounting metric is accompanied by a technical protocol that provides guidance on definitions, scope, implementation, compilation, and presentation, all of which are intended to constitute suitable criteria for third-party assurance.

Activity metrics – A set of metrics that quantify the scale of a company’s business and is intended for use in conjunction with accounting metrics to normalize data and facilitate comparison.

Additionally, the SASB standards are organized around five broad sustainability dimensions that comprise the universe of sustainability issues: (1) environment; (2) social capital; (3) human capital; (4) business model and innovation; and (5) leadership and governance.

Companies may choose to utilize the SASB standards most relevant to the company’s industry or industries in preparing its sustainability reporting. The format for such reporting may vary greatly and includes sustainability reports, integrated reporting, websites, or components within annual reports to shareholders.

The SASB Standards have been designed and developed based upon the SASB’s Conceptual Framework that sets out the basic concepts, principles, definitions, and objectives that guide its approach to setting standards. As a core principle, the SASB seeks to align its standards and metrics with existing accounting and reporting frameworks and other reporting mechanisms and protocols, such as regulatory filings or industry-developed best practices.

Source: The SASB Conceptual Framework

What is the SASB?
The SASB is an independent, nonprofit standard-setting organization, established in 2011 to develop and disseminate cost-effective sustainability reporting standards to facilitate communication by companies to investors of decision-useful information on sustainability matters. The independent arm of the SASB sets sustainability disclosure standards that are industry-specific and tied to the SEC concept of materiality to investors. The standards are intended to capture sustainability matters that are financially material – reasonably likely to have a material impact on financial performance or consideration. They also provide a tool by which companies may measure their performance against their peers and to take steps to address vulnerabilities and opportunities and move toward more efficient, stable, and resilient markets.

The SASB follows a regular cycle of updating the standards to ensure responsiveness to changing market needs. The development of the SASB Standards was not done in a vacuum and the SASB has indicated that these standards can also be used alongside other sustainability frameworks (see discussion below) and align with recommendations from the Task Force on Climate-related Financial Disclosures and the Global Reporting Initiative.
The SASB Board is composed of a representative stakeholder group that includes former lead regulators from both the SEC and the FASB, attorneys, politicians, business and operational executives, institutional and individual investors, and auditors.

The SASB receives it funding from a range of sources, including contributions from philanthropies, companies, and individuals, as well as through the sale and licensing of publications, educational materials, and other products. The SASB does not receive government financing nor is it affiliated with any governmental body, the FASB, the IASB, or any other financial accounting standards-setting body.

What is the purpose of sustainability reporting?
Traditional financial statements only go so far in capturing all factors that contribute to a company’s ability to create value over time. Sustainability reporting, along with other types of similar reporting known as triple bottom line reporting and/or corporate social responsibility (CSR) reporting, has evolved out of the perceived need to provide additional information about how companies manage environmental, social and human capitals, as well as corporate governance to enhance a decision maker’s understanding of all of the company’s material risks and opportunities. Providing such information, over time, may provide investors and key stakeholders with a more complete view of the ability of a company to manage risks and sustain value creation. Additionally, with a goal of broad disclosure across an industry, investors and key stakeholders may be better able to more fully understand the interrelated nature between financial and nonfinancial factors and risks that impact a company’s future financial position and how sustainability issues are managed across the supply chain. This better enables comparison and the ability to distinguish companies based on their strategies and operations with respect to these types of issues.

What’s in a name?
Various formats of nonfinancial reporting continue to evolve over time – similar perhaps but each with slightly different objectives. For example, sustainability reporting may be viewed as providing information focused on the future, forward thinking plans to sustain a business and improve targets – for instance, waste reduction and innovative brand development. CSR Reporting tends to capture projects and activities that have been done in the past to support community projects. CSR also tends to have much more of a compliance objective and focuses mainly on social aspects. Sustainability reporting may be thought of an umbrella for all key business aspects and activities that envelopes the financial, social, environmental, governance, cultural issues. In short, sustainability reporting is a forward-looking approach acting as an umbrella for all critical business inputs (limited resources) functions (operations), investment (money, time) and impacts (positive and negative) of which CSR Reporting may represents certain underlying elements.

Is sustainability reporting required in the U.S.?
Sustainability reporting is not necessarily required in the U.S. However, under SEC Regulation S-K, certain sustainability-related information is required to be disclosed by public companies. Regulation S-K sets forth the specific disclosure requirements associated with Form 10-K and other SEC-required filings and, among other things, requires that companies describe known trends, events, and uncertainties that are reasonably likely to have material impacts on their financial condition or operating performance in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of Form 10-K or 20-F. Within the MD&A section, companies must “provide investors and other users with material information that is necessary to [form] an understanding of the company’s financial condition and operating performance, as well as its prospects for the future.” Also, under Item 503(c) of Regulation S-K, companies are required to disclose risk factors—factors that may affect a company’s business, operations, industry or financial position, or its future financial performance.
In 2016, the SEC issued a Concept Release on modernizing Regulation S-K disclosure requirements which generated significant public feedback on specifically improving sustainability-related disclosure information in SEC filings. To address the growing interest in ensuring reliability and comparability in sustainability reporting, in July 2017, the AICPA issued Attestation Engagements on Sustainability Information (Including Greenhouse Gas Emissions Information), as a guide to auditors engaged to perform an exam or review pertaining to sustainability information.

Use of the SASB standards provide a materiality focus that is consistent with the SEC’s definition of materiality – issues that are reasonably likely to impact the financial condition or operation performance of a company and therefore are most important to investors.

Who is providing sustainability reporting in the U.S.?
Despite certain required public company reporting, the evolution of voluntary sustainability disclosure currently remains heavily with large companies. The Governance & Accountability Institute study found that 85% of the S&P 500 published sustainability or corporate responsibility reports in 2017, which was up significantly from 20% in 2011.

Increasingly, however, institutional investors and asset managers serving large and mid-market companies are pushing for greater board accountability and focus on sustainability metrics—as evidenced by Northern Trust’s proxy voting guidelines promoting energy efficiency, Trillium Asset Management’s push in favor of greenhouse gas emissions reporting, and Vanguard’s renewed focus on sustainability. In his January 2018 annual letter to CEOs, Larry Fink, CEO of Black Rock, focused on the board’s engagement in developing a company’s long-term strategy and value creation. He went on to highlight “a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we [Blackrock] are increasingly integrating these issues into our investment process.”

Where Do U.S. corporate directors stand on sustainability reporting?
Interestingly, BDO’s findings from our most recent annual survey of public company board directors, seemed to indicate that sustainability reporting has taken a back burner and may not be a high priority on the board’s agenda.

Perhaps sustainability is still thought of by directors as something that is primarily for large, international corporations the likes of Coca Cola, Allergan, and Merck. Perhaps these findings are attributable to a lesser media focus than in the prior year which featured the US exit from the Paris Climate Accord or Exxon’s notable proposal approved by its shareholders requiring measurement and disclosure as to how regulations to reduce greenhouse gases and new energy technologies could impact the value of its oil assets. Whatever the reason, we believe that as the pace of change and availability of instant data continues to drive all companies toward a more globally conscious economy, companies of all sizes may feel more intense pressure to publicly address what they are doing to promote good environmental, social and corporate governance (ESG) practices within their organizations.

Why may Small Cap companies want to consider sustainability reporting?
While our survey compiled opinions shared with us in July and August, BDO more recently designed and sponsored a session during the Small Cap Symposium at the NACD’s Global Board Leaders’ Summit held in Washington, D.C. in early October. Our moderated panel featured D’Anne Hurd, a seasoned director of Pax World Funds, and Veena Ramani, the leader of Capital Market Systems from Ceres, who shared persuasive thoughts and real company examples on the value in developing and communicating a sustainable strategy in a small cap company. Over 150 corporate directors engaged in significant discussion and observations with our panel on how smaller companies and their stakeholders stand to benefit from sustainability reporting.

A few of the key discussion points from the conference included:

Realization: Tangible returns being realized in adoption of sustainable practices

Competitive differentiator: Use of voluntary disclosure as opportunity to tell unique stories to the marketplace which can serve as competitive differentiators

Capitalizing on investment trends: Cultivation and incorporation of evolving investing practices in companies that can demonstrate long term value creation initiatives

Engagement of shareholders: Getting out in front of threat of increasing shareholder proposals focused on ESG

Protect reputation and improve public relations: Communicating fulfillment of a deemed duty by the market as a “good corporate citizen”

Attraction and retention of talent: A potential further differentiator in war for attracting and retaining good talent

Next steps?
With the release of these anticipated industry-specific standards, the SASB has helped pave the way for companies to have a more uniform approach to reporting on sustainability information to enhance and expand financial reporting.

For your further consideration related to the topics outlined above, we have compiled the additional recommended resources:

Introduction

In February 2016, the Financial Accounting Standards Board (“FASB” or “the Board”) issued its highly-anticipated leasing standard in ASU 2016-02[1] (“ASC 842” or “the new standard”) for both lessees and lessors. Under its core principle, a lessee will recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all leases[2]. The pattern of expense recognition in the income statement will depend on a lease’s classification.

For calendar-year public business entities the new standard takes effect in 2019, and interim periods within that year; for all other calendar-year entities it takes effect in 2020, and interim periods in 2021. The full standard is available here. BDO’s newsletter providing an overview of the new standard is available here.

One of the most challenging aspects of the new standard can be identifying when a contract is or contains a lease, in particular determining when service contracts contain embedded leases. This practice aid will briefly discuss the definition of a lease in ASC 842 and provide illustrative examples to demonstrate the concepts.

Scope

The scope of the new standard is generally consistent with prior guidance as it limits the application of the guidance on identifying leases to leases of property, plant or equipment.

BDO Observation: Although the Board acknowledged in paragraph 110 in the Basis for Conclusions of ASU 2016-02that the conceptual basis for excluding leases of intangible assets, inventory and assets under construction from the scope of the new standard is unclear, it nonetheless decided to continue to limit the scope of the new standard to property, plant or equipment only. As a result, those other arrangements will continue to be accounted for under ASC 350, ASC 330 and ASC 360, respectively. In addition, leases to explore for or use minerals, oil, natural gas and other similar resources, including leases of mineral rights, will continue to be accounted for under ASC 930 and 932, while leases of biological assets, including timber, will continue to be accounted for under ASC 905.

Land Easements
Land easements (also commonly referred to as rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose. Easements are used in a variety of industries, but are especially common in the energy, utilities, transportation and telecom industries. For example, an electric utility will typically obtain a series of contiguous easements so that it can construct and maintain its electric transmission system on land owned by third parties. A land easement may be perpetual or term based, provide for exclusive or nonexclusive use of the land, and may be prepaid or paid over a defined term.

Diversity in practice currently exists in the accounting for land easements. Entities typically account for their land easements by applying ASC 350, ASC 360, or ASC 840.

Because of that diversity, in January 2018 the FASB issued ASU 2018-01[3] which is intended to reduce the cost and complexity associated with assessing whether all existing and expired land easements meet the definition of a lease under ASC 842. Specifically, ASU 2018-01 allows entities that previously did not account for land easements as leases under ASC 840 to elect a transition practical expedient to not assess those land easements under ASC 842 when adopting the new standard. Instead entities will continue to account for those land easements under other ASCs unless the land easement is modified on or after ASC 842’s adoption date. Once an entity adopts ASC 842, it must apply the new standard prospectively to all new or modified land easements that meet the definition of a lease in ASC 842. An entity that currently accounts for land easements as leases under ASC 840 cannot elect this practical expedient for those easements.

Example 1: Electric Company obtained a series of easements from Southern Railroad years before its adoption of ASC 842. The easements were obtained so that Electric Company could install poles to which its power lines would be attached. In addition to installing its poles, Electric Company has the right to access the poles via a corridor leading from the nearest road to the pole. Electric Company made an upfront payment under the easement agreement in return for perpetual access rights. Electric Company has historically accounted for those land easements along with its poles as property, plant and equipment under ASC 360.

Because Electric Company did not account for those land easements as leases under ASC 840, it may elect the practical expedient provided in ASU 2018-01. This means Electric Company would continue to account for those land easements under ASC 360 unless the agreement is modified on or after ASC 842’s adoption date, in which case Electric Company would need to assess whether those easements meet the definition of a lease under ASC 842. If elected, the practical expedient must be applied to all land easements not accounted for as leases under ASC 840.

Alternatively, if Electric Company does not elect the land easements practical expedient, it must evaluate all existing land easements when adopting the new standard to determine whether those easements meet the definition of a lease under ASC 842. In this example, the agreement does not contain a lease. Paragraph 842-10-15-3 states that a lease conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The fact that the contract is perpetual means that it is not for a specific period of time, and, therefore, the right does not meet the definition of a lease. Careful consideration should be given when evaluating land easements under ASC 842 as terms and conditions may vary greatly between agreements.

Definition of a Lease

The Master Glossary defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”
For a contract to be or include a lease, there must be an identified asset and the contract must grant to the customer throughout the period of use both:

The right to obtain substantially all of the economic benefits from the asset’s use (the economic criterion), and

The right to direct the use of the identified asset (the power criterion).

Identified Asset
To have an identified asset, a contract must either explicitly or implicitly specify the asset. Similar to prior requirements, an asset is not considered specified if the supplier has the right to substitute similar assets and therefore maintains control over the asset during the period of use. However, under the new standard substitution rights are considered substantive as described in paragraph 842-10-15-10 only if the supplier:

Has the practical ability to substitute alternative assets throughout the period of use, and

Would benefit economically from the substitution.

Importantly, the evaluation of whether a supplier substitution right is substantive must be based on facts and circumstances at contract inception and must exclude consideration of future events that are not likely to occur (for example, an agreement with a future customer to pay an above-market price for use of the asset).

If a supplier’s substitution right is substantive, then there is no identified asset, and thus the contract does not contain a lease. A supplier’s right to substitute the asset only on or after a particular date or event, for repairs and maintenance or based on the availability of a technical upgrade, are not considered substantive. In addition, the new standard highlights that if the asset is located at the customer’s premises, the costs associated with substituting the asset are generally higher than when located at the supplier’s premises, and therefore are more likely to exceed the related benefits. If the supplier costs to substitute exceed the related benefits, the substitution right would not be substantive. If the customer cannot determine whether a substitution right is substantive, the customer must presume that the substitution right is not substantive (that is, there is an identified asset, and the entity must evaluate the economic and power criteria to determine whether there is a lease).

BDO Observation: As noted above, the requirement that a right of substitution would provide economic benefits to the supplier in order to be considered substantive is new and may require significant judgment. Due to this guidance, more contracts may be deemed to include a lease than under prior guidance because they include an identified asset. This determination becomes more important under the new standard due to the balance sheet implications for the lessee.

Right to Control Use (Economic and Power Criteria)
In addition to relating to an identified asset, the customer must also have the right to control the use of that asset which requires the economic criterion and the power criterion to be met.

BDO Observation: Although the right to control the use of an identified asset is not a new concept, the application in ASC 842 is different than in ASC 840. Specifically, under the guidance in ASC 840, a contract was deemed to contain a lease if:

The customer controlled the operation of the asset while obtaining more than a minor portion of the output of the asset,

The customer controlled physical access to the asset while obtaining more than a minor portion of the output of the asset, or

It was remote that any other party would receive more than a minor portion of the output of the asset and the price for the output was neither fixed per unit nor equal to the market price at time of delivery.

Under ASC 842, the lessee must have both the right to obtain substantially all of the economic benefits and the right to direct the use of the asset, which was not a prerequisite under ASC 840. As a result, certain contracts that met the definition of a lease under ASC 840 (for example power purchase agreements under (c) above) may no longer meet the definition of a lease under ASC 842.

Economic Criterion
A customer can obtain economic benefits from use of an asset directly or indirectly in many ways, such as by using, holding, or subleasing the asset. The economic benefits from use of an asset include its primary output and by-products (including potential cash flows derived from these items) and other economic benefits from using the asset that could be realized from a commercial transaction with a third-party.
The economic criterion requires that a customer has the right to obtain substantially all of the economic benefits from the use of that asset.

BDO Observation: In practice, the term “substantially all” is generally interpreted as being at or around 90% or more. This term is also used in the lease classification test (see paragraphs 842-10-25-2 and 25-3), as well as in many other areas of U.S. GAAP. An entity should ensure consistent application of the threshold. And in many cases, it will be straightforward to conclude that the customer obtains substantially all of the economic benefits (for example, when the customer has exclusive use of the asset).

Power Criterion
The power criterion is met if:

The customer can direct how and for what purpose the asset is used throughout the period of use (i.e., the customer directs the relevant decisions during the period of use), or

When the relevant decisions are predetermined,

The customer designed the asset in a way that predetermined the relevant decisions, or

The customer has the right to operate (or direct others in operating) the asset throughout the period of use.

The relevant decision-making rights to consider include, for example, the right to change the type of output produced by the asset, the right to change when or where the output is produced, the right to change whether the output is produced and how much output is produced, if any. These rights are examples only and are neither determinative nor prescriptive. For example, a requirement to use an asset in a specified location does not necessarily imply that the lessee does not direct the use of the asset.

Restrictions and Supplier Protective Rights
Both the economic and control criteria are evaluated within the defined scope of the customer’s right to use the asset. Terms that limit the use of the asset a certain way (for example specifying a maximum amount of usage of the asset) or that protect the supplier’s interest in the asset (such as requiring the customer to follow industry-standard operating procedures, or requiring notification of changes in how or where the asset will be used) do not, in isolation, prevent the customer from having the right to direct the use of the identified asset. For example, if a customer enters into a contract for the use of a corporate jet for a two-year period, restrictions within the contract limiting the number of hours the jet can be flown and/or which territories the aircraft can fly over will not prevent the customer from directing the use of the aircraft if, within that defined scope of the contract, the customer for example has exclusive use of the corporate jet throughout the two years (i.e., the economic criterion is met) and the customer decides where and when the aircraft will travel and what passengers and cargo it will transport throughout the two years (i.e., the power criterion is met).

The three key concepts (identified asset, economic criterion and power criterion) are explored through various examples below. Note that some of the examples may include nonlease components (for example, maintenance services). The examples provided herein, and conclusions reached, focus solely on whether there is a lease.

Example 2

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Substitution rights

Scope of use

Background

Paper Co enters into a contract with Printers R Us for the exclusive use of a copy machine for three years. Under the contract, the copier is explicitly specified by serial number, but Printers R Us has the right to replace the copier at any time during the agreement, including in lieu of repairing it, without Paper Co’s approval.

While the contract specifies a location for the copier, Paper Co has the right to move the copier to any of its facilities upon three days written notice to Printers R Us. Paper Co also has the right to decide when to use the copier and when it uses it, how many copies it makes (subject to a limit of 5,000 copies per month).

Analysis

Is there an identified asset?Yes
Although Printers R Us has the right to replace the copy machine at any time and without Paper Co’s approval, such substitution would likely not generate an economic benefit for Printers R Us. As noted in paragraph 842-10-15-12, if the asset is located at the customer’s premises, then the costs associated with substitution are likely to exceed the benefits associated with substituting the asset. Specifically, in this example Printers R Us would incur costs to substitute the copy machine, such as employee time and costs of transporting and installing another copy machine and removing and transporting back the original copy machine. It is not likely that events or circumstances would arise at contract inception from which Printers R Us would generate more cash flows by substituting the copy machine than the costs it would incur. In addition, as noted in paragraph 842-10-15-14, rights to substitute identified equipment solely for repairs and maintenance are not substantive. Accordingly, Printers R Us’ substitution right is not substantive and there is an identified asset.

Is the economic criterion met?Yes
Paper Co has the right to obtain substantially all of the economic benefits from the use of the copier because it has exclusive use of the copier.

Is the power criterion met?Yes
The 5,000-copy limit per month protects Printer R Us’ copier and in effect defines the scope of the contract. Within that scope, Paper Co has the right to direct the use of the copier, including when to use it and for how long, how many copies to make (subject to the limit) and where to use it, throughout the three-year period. Those decisions are the relevant decisions that impact the economic benefits from use of the copier.

Therefore, the contract is a lease.

Example 3

Concept explored

Identified Asset

Emphasis

Substitution rights

Background

Outpatient Services, Inc. (“OSI”) signs a contract with Medical Equipment Company (“MEC”) under which OSI will use five chemotherapy machines for a period of three years. The machines are delivered to OSI’s location, and OSI has the right to use the machines in any way and at any time it deems appropriate during the three-year term of the agreement, subject to restrictions requiring the machines to be used pursuant to manufacturer-provided and FDA approved use guidelines.

Each machine is expected to be able to provide up to 1,000 treatments before needing maintenance, and each machine has an expected useful life of approximately 5,000 treatments, which normally equates to five to six years. However, each machine can only be used to provide up to 10 chemotherapy treatments before being recalibrated pursuant to FDA guidelines, at which time MEC is required to provide the services necessary to allow OSI to continue providing its chemotherapy services. MEC maintains a large pool of chemotherapy machines at specified locations (which are within a reasonable distance from its customers) which have been properly cleaned and calibrated. When OSI contacts MEC to request recalibration of one of its machines, MEC retrieves that machine and replaces it with a fresh machine. MEC also has the right to replace a machine at its convenience.

Analysis

Is there an identified asset?No
While the machines are housed at OSI’s location, MEC has the right to substitute throughout the three years another equivalent machine rather than calibrating the machine originally delivered and that right is considered substantive because:

MEC has the practical ability to substitute each machine throughout the period of use considering its large pool of machines and reasonable distance from its customers. MEC also does not need OCI’s approval to substitute the machines,

MEC would benefit economically because MEC has centralized calibration operations in a single facility within a reasonable distance from its customers which allows it to reduce costs of calibration (including transportation) in excess of the costs that it otherwise would incur to calibrate the machines at the clients’ location, while ensuring constant access to calibrated machines for its customers as required per the agreement. Those events are likely to occur at contract inception considering MEC’s historical experience, business and operations. In addition, MEC may benefit from replacing a machine prior to a customer’s request if MEC is replacing another machine in that customer’s general vicinity, as that further reduces MEC’s transportation costs.

The contract does not contain a lease.

Example 4A (Adapted from paragraphs 842-10-55-42 through 55-47)

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Substitution rights

Scope of use

Background

Smith & Company (SmithCo) enters into an agreement with Freight Systems Limited (Freight) under which Freight provides SmithCo with the use of ten rail cars of a particular type for five years. The contract specifies the rail cars, which are owned by Freight. The agreement provides certain limitations on what types of goods SmithCo can transport, such as hazardous materials or explosives, but otherwise, SmithCo has the right to determine whether the rail cars are used, and if so, where, when and which products are transported using the rail cars. When the rail cars are not in use, they are stored at SmithCo’s property. If a particular car needs to be serviced or repaired, Freight is required to substitute a rail car of the same type. Otherwise, Freight cannot retrieve the rail cars during the five-year period of the contract other than on default by SmithCo.

Analysis

Is there an identified asset?Yes
It includes ten identified rail cars. Once the cars are delivered to SmithCo, they can only be substituted when they need to be serviced or repaired, which is not considered a substantive substitution right based on the guidance in paragraph 842-10-15-14.

Is the economic criterion met?Yes
SmithCo has the right to obtain substantially all of the economic benefits related to the use of the rail cars over the five-year period of use because SmithCo has exclusive use of the cars during that period.

Is the power criterion met?Yes
SmithCo has the right to direct the use of the cars. The contractual restrictions on the cargo that can be transported are protective rights of Freight and those define the scope of SmithCo’s right to use the rail cars. Within that scope, SmithCo has the right to determine whether the rail cars are used, and if so, where, when and which products are transported using the rail cars.

The contract contains a lease of ten rail cars.

Example 4B (Adapted from paragraph 842-10-55-48 through 55-51)

Concepts explored

Identified Asset

Emphasis

Substitution rights

Background

Assume the same as Example 4A except that the contract between SmithCo and Freight requires Freight to transport a specified quantity of products by using a specified type of rail car in accordance with a stated timetable for a period of five years. The timetable and quantity of products specified are economically equivalent to SmithCo having the use of ten rail cars for five years. Freight has a large pool of similar rail cars that can be used to fulfill the requirements of the contract. The rail cars are stored at Freight’s location when not in use.

Analysis

Is there an identified asset?No
The rail cars used to transport SmithCo’s products are not identified assets. Freight has the practical ability to substitute each rail car throughout the period of use without SmithCo’s approval, and Freight would benefit economically from substituting each car because the costs to substitute are minimal, and substitution allows Freight to use the cars that in the most efficient way for the task, for example because they are currently at a rail yard close to the point of origin. Those conditions are likely to occur at contract inception considering Freight’s historical experience, business and operations. Accordingly, Freight’s substitution right is substantive. Therefore, although SmithCo has the right to use the equivalent of ten rail cars for five years, Freight directs the use of those rail cars by determining which cars will be used for each particular delivery.

The agreement does not contain a lease.

Example 5 (Adapted from paragraph 842-10-55-63 through 55-71)

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Substitution rights

Economic benefits

Scope of use

Background

Retailer enters into a contract with Mall Owner for the use of retail unit A for a five-year period. Retail unit A is part of a larger mall space with many retail units. Retailer is required to use retail unit A to operate its well-known store brand to sell its goods during the hours that the mall is open. Retailer makes all of the decisions about the use of retail unit A during the period of use (e.g., deciding on the mix of goods and at what price to sell them), and controls physical access to the unit throughout the term. Retailer will pay Mall Owner $50,000 per month plus 6% of monthly net sales.

Mall Owner can require Retailer to relocate to another retail unit. In that case, Mall Owner is required to provide Retailer with a retail unit of similar quality and specifications as retail unit A and to pay for Retailer’s relocation costs, including reimbursement for any leasehold improvements that cannot be relocated.

Analysis

Is there an identified asset?Yes
Retail unit A is an identified asset which is explicitly specified in the contract. Mall Owner’s substitution right is not substantive. Mall Owner would benefit economically from relocating Retailer only if a major new tenant were to decide to occupy a large amount of retail space at a rate sufficiently favorable to cover the costs of relocating Retailer and other tenants in the space that the new tenant will occupy. Although it is possible that those circumstances will arise, at contract inception it is not likely that those circumstances will arise, and whether such circumstances occur is highly susceptible to factors outside of Mall Owner’s influence.

Is the economic criterion met?Yes
Retailer has exclusive use of unit A and therefore obtains substantially all of the economic benefits from use. Although Retailer will pay Mall Owner a portion of the cash flows derived from sales in retail unit A (i.e., 6% of monthly net sales), this represents consideration that Retailer pays to Mall Owner for the use of retail unit A and it does not affect the evaluation of the economic criterion in accordance with paragraph 842-10-15-19.

Is the power criterion met?Yes
The contractual restrictions on the types of goods that can be sold and when the store must be open define the scope of Retailer’s use of retail unit A, but within that scope, Retailer makes the relevant decisions about how and for what purpose the space is being used (for example, how much inventory to hold at the store, the mix of its goods to sell, the price of goods sold, etc.).

The contract contains a lease of retail space.

Example 6

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Scope of use

Background

Pizzeria Co. enters into a syrup supply agreement with Beverage Co. under which Beverage Co. agrees to supply soft drink syrup to Pizzeria Co. for three years. In addition, Beverage Co. will provide dispensers that combine the syrup with CO2 to deliver soft drinks to Pizzeria Co.’s customers. Pizzeria Co. is responsible for purchasing the CO2 and for maintaining the dispensers, and the agreement prohibits Pizzeria Co. from using the dispensers with another supplier’s syrup. Beverage Co. will provide two maintenance services per year per store to repair the dispensers at no charge, but additional maintenance visits will be charged on a time and materials basis. Otherwise, the pricing under this agreement is completely variable. That is, it is based on the volume of syrup purchased by Pizzeria Co.

Analysis

Is there an identified asset?Yes
While the agreement does not explicitly specify the individual beverage dispensers, the units are implicitly specified because the dispensers are required for Beverage Co. to fulfill its promise under the arrangement, and once installed, Beverage Co. has no right to substitute the installed equipment.

Is the economic criterion met?Yes
Pizzeria Co. has exclusive use of the beverage dispensers.

Is the power criterion met?Yes
Pizzeria Co. has the right to direct the use of the dispensers including determining when and how often to use them. The fact that the agreement prohibits Pizzeria Co. from using the dispensers with another supplier’s products is a protective right that does not prevent Pizzeria Co. from controlling their use.

The agreement contains a lease.[4]

Example 7

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Capacity portions versus physically distinct assets

Background

The owner of a co-location warehouse (“Co-Lo”) enters into an agreement with Software Company (“Software”) under which Software will install its servers and other IT equipment used to host and run its software platform. The agreement identifies specific space within the larger warehouse for Software to use, and indicates that Co-Lo does not have the right to relocate Software’s equipment once it is installed. The space that Software will occupy does not represent substantially all of the capacity of the warehouse. However, Software is required to install cages and other barriers that segregate its equipment from the rest of the warehouse, thus effectively physically segregating the space it is using.

Analysis

Is there an identified asset?Yes
Although the space is not initially a physically distinct portion of the larger warehouse and the space occupied does not represent substantially all of the capacity of the warehouse, the caging and other barriers required to be installed by Software render the space physically distinct and allow Software to control access to that specific space. In addition, Co-Lo has no ability to substitute comparable space throughout the term of the contract. Therefore, there is an identified asset.

Is the economic criterion met?Yes
Because Software has the right to control access to the specified space, it has the right to obtain substantially all of the economic benefits from use of the space (it has exclusive use of it).

Is the power criterion met?Yes
Software has the ability to make decisions about whether to use the space, and if so, when, how and how much to use the space.

The contract is a lease.

Example 8

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Substitution rights (supplier versus customer)

Background

ABC Company (“ABC”) enters into a hosting arrangement with Small Hosting Co. (“Small Hosting”) under which Small Hosting will provide a specific number of servers and related IT equipment on which it will host software licenses owned by ABC. In addition, Small Hosting will provide connectivity to allow ABC to access the software hosted by Small Hosting.

Because of the number of users in ABC’s environment and the complexity of the software environment, Small Hosting must host ABC’s software on dedicated servers, i.e. no other customer can be hosted on the same servers. However, Small Hosting has the right to rehome ABC’s software onto different servers without ABC’s approval so long as access to its software licenses is uninterrupted.

Although Small Hosting will provide monitoring services, ABC makes all decisions about which software to load onto the servers, and what types and how much data to transmit using the servers.

Analysis

Is there an identified asset? Yes (ABC), No (Small Hosting)
Small Hosting considers whether this arrangement contains identified assets (i.e., servers and related IT equipment). Small Hosting considers that it has several facilities and numerous servers from which it can host ABC’s software, and that ABC cannot prevent it from switching servers so long as access to its software is uninterrupted. Therefore, Small Hosting concludes that it has the practical ability to substitute ABC’s servers and other IT equipment. Small Hosting also considers its right to rehome that software and concludes that it would obtain an economic benefit from substitution. Specifically, it is common for new hosting customers to be obtained, at which time Small Hosting often reconfigures its server space. In addition, to maximize performance on its servers, Small Hosting regularly adds or deletes servers and moves customers as needed. Accordingly, Small Hosting concludes that its right of substitution is substantive, and therefore the contract does not include identified assets and thus is not a lease.

ABC, however, does not have visibility into Hosting’s operating practices and business (including how many servers Small Hosting has and how many customers it serves). Therefore, it concludes pursuant to the guidance in paragraph 842-10-15-15 that Small Hosting’s right of substitution is not substantive, which means the agreement includes identified assets.

Is the economic criterion met? Yes (ABC Only)
Small Hosting must host ABC’s software on dedicated servers, which means no other customer can be hosted on those servers. Accordingly, ABC has exclusive use of the servers and therefore it obtains substantially all of the economic benefits from use of those.

Is the power criterion met? Yes (ABC Only)
ABC makes all decisions about which software to load onto the servers, and what types and how much data to transmit using the servers. Those are the relevant how and for what purpose decisions.

Small Hosting concludes that it does not have a lease.
ABC concludes the agreement contains a lease and a monitoring service. ABC could elect the practical expedient to not separate lease and nonlease components but to account for the combined component as a lease under ASC 842.

Example 9

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Background

Telco enters into an agreement with Logistics Company which requires Logistics Company to build a warehouse in a specified geographic area. Logistics Company is the legal owner of the warehouse and continues to be throughout the term of the contract. The agreement does not result in Telco controlling the warehouse under construction based on the guidance in paragraph 842-40-55-5. While Logistics Company has some latitude in selecting the location of the warehouse, it must be located in the specified area, and once constructed it cannot be relocated or substituted, even within the specified area, absent extraordinary circumstances (for example, destruction by fire). For the five-year term of the agreement, Logistics Company will process all returned handsets directed by Telco to this warehouse pursuant to repair instructions provided by Telco. If Telco does not direct handsets to the warehouse, then the warehouse does not operate. Logistics Company is not allowed to service any customers other than Telco in the warehouse under the agreement. Logistics Company is required to operate and maintain the warehouse daily in accordance with industry-approved operating procedures.

Analysis

Is there an identified asset?Yes
Once the location is selected and the warehouse constructed, Logistics Company does not have the right to substitute the specified warehouse location.

Is the economic criterion met?Yes
If Telco does not direct handsets to the warehouse, the warehouse does not operate because Logistics Company is not allowed to service other customers. In other words, Telco has exclusive use of the warehouse.

Is the power criterion met?Yes
Telco makes the relevant decisions about how and for what purpose the warehouse is used because it has the right to determine whether, when and how many handsets are processed in the warehouse. Because Logistics Company is precluded from using the warehouse for any other customer or purpose, Telco’s decision making about the timing and quantity of handsets processed in effect determines whether and when the warehouse will be utilized.

The contract contains a lease.

Example 10 (Adapted from paragraph 842-10-55-100 through 55-107)

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Background

Brand X enters into an agreement with Contract Manufacturing Company (“CMC”) to purchase a particular type, quality and quantity of shirts for a three-year period. The type, quality and quantity of shirts are specified in the contract.

CMC has only one factory that can meet the needs of Brand X and it is unable to supply the shirts from another factory or source the shirts from a third-party supplier. The capacity of the factory significantly exceeds the output for which Brand X has contracted. CMC makes all decisions about the operations of the factory, including the production level at which to run the factory and which customer contracts to fulfill with the output of the factory that is not used to fulfill Brand X’s contract.

Analysis

Is there an identified asset?Yes
The agreement contains an implicitly specified asset because CMC can only fulfill the contract through the use of this factory.

Is the economic criterion met?No
Brand X does not have the right to obtain substantially all of the economic benefits from use of the factory. CMC could decide to use the factory to fulfill orders from other customers during the three-year term of the agreement, and the capacity of the factory significantly exceeds the output for which Brand X has contracted.

Is the power criterion met?No
Brand X’s rights are limited to specifying output from the factory in its contract, and it has only the same rights regarding use of the factory as do any other customers purchasing shirts or other products from the factory. Instead, CMC has the right to direct the use of the factory because it can decide how and for what purpose the factory is used.

The agreement does not contain a lease.

Example 11

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Economic benefits

Relevant decisions

Background

Midstream Company (“Midstream”) owns and operates an oil and gas gathering system in a specific area within the Permian basin. Midstream enters into a gas gathering agreement with Oil & Gas Company (“O&G”) to provide gathering services for O&G in the area covered by Midstream’s gathering system for a period of 10 years. The pipeline lateral used to fulfill the contract is connected to Midstream’s integrated pipeline system.

The contract provides Midstream with the exclusive right to receive, gather and transmit all gas produced by O&G in the area, and the system must always be available to transmit the gas produced by O&G. However, Midstream retains certain rights associated with the pipeline lateral. For example, Midstream can use the pipeline lateral to store other customers products, to use it for system balancing purposes, or to take advantage of market price fluctuations through park and loan services. Midstream also has the right to connect other pipelines to the pipeline lateral without O&G’s consent as long as Midstream continues to service the volumes produced by O&G.

Analysis

Is there an identified asset?Yes
The pipeline lateral is explicitly identified, and Midstream does not have an alternative asset that could be used to fulfill the contract. Paragraph 842-10-15-16 also describes “a segment of a pipeline that connects a single customer to the larger pipeline” as one example that is considered an identified asset.

Is the economic criterion met? No
Although Midstream’s system must always be available to transmit the gas produced by O&G, O&G does not have exclusive use of the pipeline lateral because Midstream has the right to use the pipeline for other purposes. The pipeline lateral can handle more capacity than the capacity requested by O&G and Midstream also can increase the capacity of the pipeline lateral through various mechanisms. Midstream has the right to use that excess capacity for its own economic benefits throughout the 10 years (for example, to store other customers’ products, for system balancing purposes, to take advantage of market price fluctuations through park and loan services, etc.) and those economic benefits are considered significant.

Is the power criterion met?No
O&G can only request that Midstream transports the quantity of gas that it produced and does not have the right to direct how and for what purpose the pipeline is used. Midstream retains the relevant decisions about the use of the pipeline lateral throughout the 10 years. Those decisions include whether to store other customers’ products or use excess capacity for other purposes, whether to connect additional pipelines, etc. Midstream makes those decisions throughout the 10-year contract.

The agreement does not contain a lease.

Example 12A (Adapted from paragraph 842-10-55-108 through 55-111)

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Economic benefits from use of the asset (renewable energy credits vs. tax credits)

Relevant decisions are predetermined

Background

County Electric Company (“CEC”) enters into a contract with Solar Power Co. (“Solar”) to purchase all of the electricity produced by a new solar farm for 20 years. The solar farm is explicitly specified in the contract, Solar has no substitution rights, and the energy cannot be provided from another asset.

CEC designed the solar farm before it was constructed – CEC hired experts in solar energy to assist in determining the location of the farm and the engineering of the equipment to be used. Solar is responsible for building the solar farm to CEC’s specifications and then operating and maintaining it on a daily basis in accordance with industry-approved operating practices.

Solar will receive tax credits related to the construction and ownership of the solar farm, while CEC receives renewable energy credits that accrue from the use of the solar farm.

Analysis

Is there an identified asset?Yes
There is an identified asset because the solar farm is explicitly specified in the contract, and Solar does not have the right to substitute the specified solar farm.

Is the economic criterion met?Yes
CEC takes all the electricity produced by the farm, as well as the renewable energy credits that are a by-product from the use of the farm. Although Solar receives economic benefits from the solar farm in the form of tax credits, those credits relate to the ownership of the solar farm rather than from its use, and thus are not considered in the evaluation of the economic criterion.

Is the power criterion met?Yes
There are no decisions to be made during the period of use about whether, when, or how much electricity will be produced because the design of the asset has predetermined these decisions.

Although CEC does not operate the solar farm, its design of the farm has given it the right to direct the use of the farm. Because the design of the solar farm has predetermined how and for what purpose the asset will be used throughout the period of use, CEC’s control over that design is substantially no different from CEC controlling those decisions.

This contract contains a lease.

Example 12B (Adapted from paragraph 842-10-55-112 through 55-116)

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Relevant decisions are predetermined

Background

Assume the same fact pattern as in Example 12A, except that Solar designed the solar farm when it was constructed prior to entering into the contract with CEC, and CEC had no involvement in that design.

Analysis

Is there an identified asset?Yes
Same as Example 12A.

Is the economic criterion met?Yes
Same as Example 12A.

Is the power criterion met?No
As in Example 12A, the relevant decisions about how and for what purpose the solar plant is used are predetermined. However, in contrast to Example 12A, CEC is not considered to have the relevant decision-making rights about the use of the solar farm because it did not design the solar farm and it does not operate the solar farm. Solar does, and therefore Solar has the right to direct the use of the farm.

The contract does not contain a lease.

Example13

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Relevant decisions

Background

EZ Co owns and operates a group of convenience stores. EZ Co enters into an agreement with State Bank in which State Bank will provide armored car services to EZ Co for three years. During the term of the contract, State Bank will collect cash and checks from each store location three times per week, and those dates and times are predetermined in the contract and cannot be changed absent emergency situations.

State Bank also provides one smart safe for each store location. The smart safe is connected electronically to State Bank’s system and will transmit the value of cash and checks deposited into the safe to State Bank such that EZ Co receives credit in its bank account with State Bank within 24 hours of that deposit. Only State Bank has the right and ability to access the smart safes. Once an EZ Co employee deposits cash or checks into the safe, EZ Co cannot retrieve those items prior to State Bank’s armored car service collecting them. However, EZ Co decides when to make deposits, as well as how much cash to deposit versus how much to retain for operating purposes.

Analysis

Is there an identified asset?Yes
Each smart safe is implicitly specified once it is installed at the convenience store location, and State Bank does not have any substitution rights.

Is the economic criterion met?Yes
EZ Co obtains substantially all of the economic benefits from use of the safes throughout the three-year term of the contract because it has exclusive use of those safes. No other customer of State Bank can use the safes.

Is the power criterion met?Yes
Although State Bank has the right to access the safes to collect the funds deposited in them, that access is predetermined in the contract (the dates and times are predetermined in the contract and cannot be changed absent emergency situations). The ability to access the safes also would not grant State Bank the right to determine how and for what purpose the safe is used given the fact that State Bank gives EZ Co access to funds deposited in the safe in EZ Co’s bank account prior to the funds actually being collected by State Bank. EZ Co determines whether to use the safe, and if so, when to use it and how much cash and checks to deposit into the safe throughout the period of use.

The agreement contains a lease (each smart safe is a lease).

Example 14

Concepts explored

Identified Asset

Economic Criterion

Power Criterion

Emphasis

Relevant decisions

Background
Big Oil Inc. (“BOI”) enters into an agreement with Drilling Company (“DrillCo”) whereby DrillCo will provide BOI with an offshore drilling rig for use in a specified geographical area in the Gulf of Mexico in which BOI has exclusive exploration rights. DrillCo has no other drilling rig in the Gulf of Mexico which could be used to fulfill the contract.

DrillCo will provide the employees and management expertise necessary to operate the drilling rig. However, DrillCo will operate the rig under BOI’s instructions (for example, where to drill, how long for and at what depth, and where to drill next). The initial term of the agreement is two years and the agreement automatically renews for additional three-month periods unless either party provides a notice of non-renewal. During the period of the agreement, DrillCo will provide drilling services to BOI using the identified drilling rig. DrillCo has no other drilling rig in the Gulf of Mexico which could be used to fulfill the contract.

Analysis

Is there an identified asset?Yes
The agreement specifies a drilling rig and DrillCo has no other rig which can be used to fulfill the contract.

Is the economic criterion met?Yes
BOI receives substantially all of the output from use of the drilling rig because it has exclusive use of the rig. DrillCo cannot use the rig to provide services to any other customer during the term of the agreement, both contractually and practically because BOI has exclusive exploration rights in that geographical area.

Is the power criterion met?Yes
Although DrillCo operates the drilling rig, and operating the rig is essential to the efficient use of the rig, the right to operate the rig is dependent on the relevant how and for what purpose decisions the rig is used (which are where to drill, how long for and at what depth, and where to drill next, etc.). BOI is the party that controls those relevant decisions throughout the period of use.

The contract contains a lease and a service (operating the drilling rig).

Note: DrillCo could assess whether the practical expedient to not separate lease and nonlease components is available related to this contract. If DrillCo concludes that the lease component is an operating lease and the nonlease component is delivered to BOI over time consistent with the delivery of the benefit from the lease, then DrillCo would further assess whether the lease component or the nonlease component is predominant. If DrillCo determines that the lease component is predominant, then the combined component is accounted for as a lease under ASC 842. Conversely, if DrillCo determines that the service component is predominant, then the combined component is accounted for as a lease under ASC 606, Revenue from Contracts with Customers.

BOI could also elect to account for the lease and nonlease components as a single lease component under ASC 842.

[2] ASC 842 provides a recognition exemption for leases with terms of one year or less and that do not include a purchase option reasonably certain of exercise. The exemption must be elected by asset class. If this exemption is elected, the lessee does not recognize the related ROU assets and lease liabilities on the balance sheet for short-term leases within that asset class.

[4] Because the pricing in this agreement is solely variable, Pizzeria Co. would not have a right-of-use asset or lease liability to recognize. However, Pizzeria Co. would need to consider the relevant lessee disclosures required by ASC 842-10-50. In addition, Pizzeria Co. could consider electing the practical expedient in paragraph 842-10-15-37 to not separate the lease and nonlease components for this asset class, and which would enable it to treat the treat the entire contract (and others in the same asset class) as a lease component.

As evidenced in the fifth annual Audit Committee Transparency Barometer, released by the Center for Audit Quality and Audit Analytics, public companies of all sizes continue to expand voluntary audit committee disclosures within their proxy statements to provide stakeholders with further insight into the oversight responsibilities, particularly with regard to the external auditor and the audit process.

Audit committees have many requirements placed upon them by regulatory bodies and exchanges. BDO’s Audit Committee Requirements Practice Aid summarizes these existing requirements and certain evolving best practices in a user-friendly tool. However, current required public communications through vehicles like the annual proxy statement and the audit committee report contained within, may leave some stakeholders perhaps looking for further insight into audit committee governance activities, particularly with regard to the oversight of the audit. In 2015, the SEC issued a concept release regarding possible revisions to audit committee disclosures which generated a renewed discussion about disclosure but has not resulted in any significant changes to date. Instead, the SEC has taken a monitoring approach to developments in practice with respect to voluntary disclosures being made by public company audit committees. The SEC further continues to emphasize disclosure effectiveness within publicly expressed statements made by SEC leadership and staff.[1] SEC Chief Accountant Wes Bricker and SEC Chairman Jay Clayton both underscored the importance of relevant audit committee disclosures during a session on the vital role of public company auditors and audit committees at the most recent AICPA Conference on Current SEC and PCAOB Developments. During that discussion, Bricker indicated:

“The audit committee report, together with the auditor’s report, will convey and should convey the relevance of both of those groups, adding to the investor’s [knowledge] not only what those groups do but how they do it. That’s important texture for investors to gage the governance and audit quality that’s been built into any given company.”[2]

In its recent Main Street Investors Survey, the Center for Audit Quality (CAQ) reports that 81% of 1,100 U.S. investors surveyed indicate confidence in public company auditors; while a similar 80% indicate confidence in independent audit committees. Both of these confidence indicators have increased significantly from 67% and 63%, respectively, in 2011. This signals an encouraging trend with respect to two critical value providers in the financial reporting chain but also indicates there remains more work to be done to increase confidence in capital markets.

As a means to capture current voluntary audit committee reporting trends, several organizations, including the CAQ and Audit Analytics along with several of the largest accounting and auditing firms, conduct annual analyses and have concluded that increasingly enhanced, voluntary disclosures are being made by audit committees across the board.

Audit Committee Transparency Barometer and Key Findings
In November 2018, the Center for Audit Quality and Audit Analytics released their fifth annual Audit Committee Transparency Barometer, examining the robustness of audit committee proxy disclosures among the Standard & Poor’s (S&P) Composite 1500 companies. Unlike similar reports that focus on the largest public companies, this report looks at the most current proxy statements filed between July 1, 2017 and June 30, 2018 across small-, mid-, and large-cap companies that compose the S&P 1500. The authors note that they continue to see encouraging year-over-year trends with respect to voluntary, enhanced disclosure around external auditor oversight included within the audit committee report and elsewhere in the proxy statement.

Within each of the areas noted above, the report provides several illustrative disclosures deemed as best practices for audit committee consideration which we encourage you to review. Additionally, the report details the five year data trends for each disclosure category listed above by disclosure question and provides comparatives across the large, the mid, and the small-cap companies in the study.

While the findings generally show more significant increases in robustness of disclosures for the large organizations, increases, some in the double digits, are noticed across all size companies. The CAQ and Audit Analytics do point out some areas of opportunity for improvements in describing how audit committees are executing their oversight responsibilities - particularly in how audit committees are compensating and appointing auditors with regard to audit quality and independence considerations. Additionally, they encourage audit committees to make clear the evaluation process of the auditor and the frequency that is being done to further improve audit quality and enhance the relationship between the audit committee and the external auditor.

BDO Additional Insight: BDO noted that disclosure of significant areas addressed by the auditor is not currently an area being disclosed voluntarily by the audit committee much, if at all. We anticipate in coming years, with the effectiveness of the new auditor reporting required disclosures of Critical Audit Matters (CAMs) under PCAOB Auditing Standard 3101, audit committees may be more focused on this particular area and the opportunity to increase communications regarding their oversight role with respect to the critical areas addressed within the audit. We encourage our clients to engage in “dry run” discussions and exercises with their engagement teams with respect to the identification and reporting of CAM during the current year audit cycle to better inform the process in preparation for effectiveness of this new requirement beginning in 2019.

In contrast, we noted that while disclosures by audit committees of large-cap companies with respect to audit tenure have increased significantly from 47% to 70% in five years, this was much less evident with mid-cap companies (42% to 52%) and relatively flat for small-cap companies. (50% to 51%). This was an interesting finding, given that 2018 was the first year in which auditors were required to provide tenure information within the auditor report. BDO notes that within the S&P 500, in looking at 422 companies with market cap greater than $10 billion, approximately 86% and 20% have had the same auditors for more than 10 years or more than 50 years, respectively[3]. Larger companies may have higher motivation to get out in front of auditor’s required disclosures to perhaps acknowledge or describe the benefits of longer auditor relationships. On the flip side are instances that require a change in auditor where proactive audit committees may want to indicate publicly, outside of a required 8-K filing, as to the many reasons as to why a change may occur.

Source: CAQ 2018 Audit Committee Transparency Barometer

PCAOB Auditing Standard (AS) 3101 addresses new disclosure requirements within the auditor report to the audited financial statements. For auditor reports issued in 2018 (e.g., audits of fiscal years ending on or after 12/15/2017), changes to the report itself, disclosures about audit firm tenure and other information were required. Beginning with large accelerated filers for audits of fiscal years ending on or after 6/30/2019, followed by other filers as of 12/15/2020[4], the auditor’s report will provide information on Critical Audit Matters (CAM) that had not previously been provided to investors. In determining what matters would be considered a CAM, auditors shall consider the following:

Transparency Continues to Take Hold
At BDO, we believe transparency and trust are the foundation of every high quality audit. We also recognize that the perceived value of our quality audits in the marketplace is derived from the trust of both those who oversee our work and those who rely on it. As a leader in the audit profession, BDO is committed to providing the same level of transparency to our stakeholders as our clients provide to theirs. It is our intent and commitment to deliver high quality audits and provide our clients with deep insights and value.

BDO Additional Insight: We continue to believe that complexity, increasing access to and the digitization of information, technological advances, and emerging risks fuel public demand for greater transparency from those charged with governance. Regulators, while potentially trying to reduce an already overwhelming disclosure burden, remain focused on the balance for meaningful investor information and are paying close attention to market communication channels.

Audit committees have the ability to provide thoughtful and insightful information about their oversight responsibilities of the audit and the auditors. Voluntary disclosure within public filings that are timely and relevant can help de-mystify the audit process and support the enhancement of audit quality. Information shared in tools like the Audit Committee Transparency Barometers serve as good bench marks to evaluate the strength of your own organization’s approach to disclosure.

[1] Refer to SEC Chief Accountant Wes Bricker’s remarks before the University of Tennessee’s C. Warren Neel Corporate Governance Center: “Advancing the Role and Effectiveness of Audit Committees.” Similar remarks were made during the Association of Audit Committee Members, Inc. Annual Meeting held on October 5, 2018.

[2] Refer to the archived “A Conversation with the SEC Chairman and Chief Accountant” recorded during the December 2017 AICPA Conference on Current SEC and PCAOB Developments.
[3] Computed from Audit Analytics Standard & Poors 500 Company data based on reported Market Cap of greater than $10 billion and disclosed auditor reporting as of 11/5/2018.

[4] Critical audit matters (CAMs), under PCAOB AS 3101, The Auditor’s Report on An Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards, will be considered voluntary disclosure for audits of broker dealers, investment companies other than business development companies, employee benefit plans, and emerging growth companies.

Summary

The FASB issued ASU 2018-18[1] to clarify when certain transactions between participants of a collaborative arrangement are within the scope of ASC 606.[2] The ASU is available here, and is effective for public entities for fiscal years beginning after December 15, 2019, and for private entities, the effective date is fiscal years beginning after December 15, 2020. Early adoption is permitted.

Background

A contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties that meet both of the following requirements:

They are active participants in the activity.

They are exposed to significant risks and rewards dependent on the commercial success of the activity.

ASC 808 does not provide specific recognition or measurement guidance on the accounting for a transaction between participants of a collaborative arrangement. Due to the lack of authoritative guidance, there has historically been diversity in practice. Implementation of ASC 606 led to uncertainty in whether a collaborative arrangement should be accounted for pursuant to ASC 606, or to other guidance. ASU 2018-18 is intended to clarify the interaction between ASC 808 and ASC 606.

Main Provisions

The amendments in this ASU make targeted improvements for collaborative arrangements as follows:

Clarify that certain transactions between collaborative arrangement participants are within the scope of ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.

Add unit-of-account (i.e., distinct good or service) guidance to ASC 808 to align with the guidance in ASC 606 to determine whether the collaborative arrangement, or a part of the arrangement, is within the scope of ASC 606.

Specifies that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, if the collaborative arrangement participant is not a customer, an entity is precluded from presenting the transaction together with revenue recognized under ASC 606. The amendments also do not address the accounting for nonrevenue transactions between collaborative arrangement participants.

There were no amendments made to transactions with a collaborative arrangement participant directly related to third-party sales, and as such, current practice remains unchanged for those arrangements.

Effective Date and Transition Requirements

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

Early adoption is permitted, including adoption in any interim period, (1) for public business entities for periods for which financial statements have not yet been issued and (2) for all other entities for periods for which financial statements have not yet been made available for issuance. An entity may not adopt the amendments earlier than its adoption date of ASC 606.

The amendments should be applied retrospectively to the date of initial application of ASC 606. An entity should recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual period that includes the date of the entity’s initial application of ASC 606.

An entity may elect to apply the amendments retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of ASC 606. An entity should disclose its election.

An entity may elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in ASC 606.

Summary

The FASB issued ASU 2018-16[1] to permit the use of the Overnight Index Swap Rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for purposes of hedge accounting under Topic 815, Derivatives and Hedging. An entity must adopt the amendments concurrently with the adoption of ASU 2017-12 if that standard has not yet been adopted.[2]

Background

In November of 2014, the Alternative Reference Rates Committee (ARRC) was convened to identify an alternative reference rate due to concerns around the sustainability of LIBOR. The AARC identified the Secured Overnight Financing Rate (SOFR) and the Federal Reserve Bank of New York (Fed) began publishing the rate since April of 2018. The SOFR is calculated daily based on overnight transactions in specified segments of the U.S. Treasury repo market from the prior day’s trading activity.

During deliberations leading to the issuance of ASU 2017-12, the Fed requested the FASB to consider making the Overnight Index Swap Rate (OIS) based on SOFR an eligible U.S. benchmark interest rate in applying hedge accounting under Topic 815. The FASB recognized that although the OIS rate based on SOFR is not yet widely recognized and quoted within the U.S. financial market, the attributes of the repo rates underlying the calculation of SOFR are.

Main Provisions

The amendments within this update permit the use of the OIS based on SOFR as a benchmark interest rate for purposes of applying hedge accounting under Topic 815. This is the fifth U.S. benchmark interest rate eligible for use in hedge accounting in addition to the following:

Interest rates on direct Treasury obligations of the U.S. government (UST)

The Master Glossary defines the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate as:“The fixed rate on a U.S. dollar, constant-notional interest rate swap that has its variable-rate leg referenced to the Secured Overnight Financing Rate (SOFR) (an overnight rate) with no additional spread over SOFR on that variable-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equates to the present value of the variable cash flows.”

Effective Date and Transition Requirements

The amendments in this ASU are required to be adopted concurrently with the amendments in ASU 2017-12 for entities that have not already adopted that guidance. For public business entities that have previously adopted ASU 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that have previously adopted ASU 2017-12, the amendments are effective after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period if an entity already has adopted Update 2017-12.

An entity should apply the amendments in this ASU on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.

Other Matters

The Board decided to add to its agenda a project to more broadly consider changes to GAAP necessitated by the market-wide transition away from LIBOR, which includes but is not limited to the transition of existing hedging relationships referencing LIBOR.

Summary

The FASB issued ASU 2018-17[1] to expand the private company alternative that allows private companies the election not to apply the variable interest entity guidance to qualifying common control leasing arrangements. The amendment broadens the scope of the private company alternative to include all common control arrangements that meet specific criteria (not just leasing arrangements). ASU 2018-17 also eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a proportionate basis. The ASU is available here, and is effective for entities other than private entities for fiscal years beginning after December 15, 2019. For private entities, it becomes effective for fiscal years beginning after December 15, 2020. Early adoption is permitted.

Background

Over the past several years, the Financial Accounting Standards Board (“FASB”) has amended the guidance for the consolidation of variable interest entities (“VIE”s) several times.[2] Through those projects, the FASB received several requests from stakeholders to clarify other aspects of the consolidation guidance for common control arrangements. As a result, the FASB performed additional research and outreach, which led to the issuance of this ASU on certain aspects of the related party guidance in VIE assessments.

Main Provisions

Private Company Accounting Alternative
Historically, ASU 2014-07[3] allowed private companies to opt out of applying the VIE consolidation guidance to certain common control leasing arrangements. The amendments in ASU 2018-17 supersede ASU 2014-07 and expand the private company accounting alternative by broadening the scope to include all common control arrangements that meet specific criteria (not just leasing arrangements).

Under the new guidance, a reporting entity may make an accounting policy election to not evaluate a legal entity under the VIE subsections if all of the following specific criteria are met:

The reporting entity and the legal entity are under common control.[4]

The reporting entity and the legal entity are not under common control of a public business entity.

The legal entity under common control is not a public business entity.

The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of Topic 810.[5] The VIE Subsections should not be applied when making this determination.

Applying this alternative is an accounting policy election that must be applied consistently to all legal entities that meet the requirements in (a) through (d). Entities that elect this alternative must also provide additional disclosures.

BDO Observation: As with other exceptions that are only available to private companies, a reporting entity should carefully consider whether it will become necessary to “unwind” this accounting election in the future, for instance, when a private company conducts an initial public offering.

Decision-Maker Fees
The amendments introduced by ASU 2016-17[6] changed the way that a reporting entity that is the single decision maker of a VIE considers indirect interests in an entity held through related parties under common control with the decision maker. Specifically, the amendment eliminated the requirement to treat such indirect interests as the equivalent of direct interests in their entirety when evaluating whether a reporting entity is the primary beneficiary (“the PB test”). Instead, the reporting entity should consider such indirect interests on a proportionate basis. For example, if a decision maker or service provider owns a 20 percent interest in a related party under common control and that related party owns a 40 percent interest in the legal entity being evaluated, the decision maker’s or service provider’s indirect interest in the VIE should be considered the equivalent of an 8 percent direct interest for assessing the PB test.

After the issuance of ASU 2016-17, practitioners noted that there was an inconsistency in the application of the PB test and the existing guidance for assessing whether a decision-maker fee represented a variable interest (“the VI test”). Specifically, ASC 810-10-55-37D still required the entity to treat indirect interests held through related parties under common control as the equivalent of direct interests in their entirety when evaluating whether the decision maker fees are a variable interest, i.e., 40% in the example above.

The amendments in ASU 2018-17 align these two assessments. Now, the reporting entity should consider indirect interests in an entity held through related parties under common control with the decision maker on a proportionate basis (rather than in their entirety) for both the VI and PB tests.

Effective Date and Transition Requirements

This ASU is effective for all entities other than private companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For private companies the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Earlier adoption is permitted, including adoption in an interim period.

An entity should apply the amendments in this ASU on a retrospective basis with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Additional transition guidance for reporting entities that are required to either consolidate or deconsolidate legal entities as a result of the application of this ASU is provided within the standard.

[4] Solely for purposes of applying this accounting alternative, only the guidance in the General Subsection of Topic 810 (i.e., the voting interest model) shall be considered in assessing whether common control exists. (In making this determination, the FASB reasoned that it would be counterproductive to require the application of the VIE guidance to determine whether a private company is eligible to not apply the VIE guidance.)

[5] Consolidation

[6] ASU 2016-17, Consolidation (Topic 810: Interests Held through Related Parties That Are under Common Control

]]>Thu, 01 Nov 2018 04:00:00 GMT3aa9e4e5-a272-43bb-9700-1fe9160c507e
As part of that commitment, we are pleased to share the 2018 Audit Committee Transparency Barometer, prepared by the Center for Audit Quality (CAQ) and Audit Analytics, which examines how public company audit committees approach the public communication of their external auditor oversight activities.

This annual report, which measures the robustness of proxy disclosures by companies in the S&P Composite 1500 (S&P 1500), shows that the amount of information available to investors and other stakeholders on audit committee oversight of the external auditor continues to increase year-over-year for past five years. Double-digit increases in audit committee transparency represent a success story and demonstrate the dedication of audit committees to fostering trust and strengthening market integrity.

A NOTE FROM BDO’S NATIONAL ERISA PRACTICE LEADER

As filing season comes to a close, there’s a distinct opportunity for sponsors to examine the health of their employee benefit plans. The results of your audit can be the catalyst to starting conversations relating to improvements, modifications or amendments to your plan.

In the past quarter, insights from BDO’s ERISA Center of Excellence have covered topics ranging from Cybersecurity as part of a plan sponsor’s fiduciary duty to how tax reform might affect ESOP valuations. We also delve into plan fees and compliance issues you should be aware of.

While you’re enjoying a slower pace over the next couple of months, be thinking about how your benefit plan can better serve your employees in 2019 and beyond. Our team is always here and happy to help!

Sincerely,

BETH GARNER
National Practice Leader, ERISA

IN THIS ISSUE...

Retirement Plan Sponsors: Is Cybersecurity Part Of Your Fiduciary Duty?

We’ve all received suspicious-looking emails asking us to provide personal information to redeem a prize that we’ve won or alerting us that someone we know needs financial help. By now, most of us recognize these scams—and don’t open the email.

Pension Benefit Guaranty Corp. Streamlines Disaster Relief Procedures

Victims of natural disasters will no longer need to wait for extension instructions from the Pension Benefit Guaranty Corp. (PBGC) to meet certain deadlines, thanks to a new policy issued in July 2018.

​How Tax Reform Could Affect ESOP Valuations

The Tax Cuts and Jobs Act of 2017 (TCJA) was the most sweeping change to the tax code since the mid-1980s. There were only a few provisions in the law that apply to employee stock ownership plans; the reduction of corporate taxes in particular will have a significant impact on stock valuations in these types of defined contribution plans. As a result, companies with ESOPs should begin thinking about what a potential surge in their stock valuations in 2018 could mean for their funding strategies.

Fees For 401(k) Services: What Plan Sponsors Need To Know

Political candidates who don’t know the cost of a gallon of gas or a movie ticket usually wind up paying that price with voters and losing on election day. Likewise, many plan sponsors are finding themselves on the losing side of lawsuits because they allowed their defined contribution plan to pay unreasonable service fees.

401(k) Plan Compliance: What Plan Sponsors Need To Know

Defined contribution plans, and 401(k) plans in particular, offer myriad benefits for workers and employers, and these plans can be powerful tools to help organizations attract and retain talent. Despite these benefits, only 62 percent of private sector employees have access to a defined contribution plan, according to the Bureau of Labor Statistics. This figure drops to 41 percent for companies with 50 to 99 people.

Using EPCRS To Correct Retirement Plan Errors

Everyone makes mistakes, and for plan sponsors, the ability to identify and remedy errors is essential for maintaining the plan’s tax benefits. For plan sponsors who may have deviated from their plan documents, or need to make other corrections, the Internal Revenue Service (IRS) provides three options to fix errors so organizations can keep all the tax advantages that come with their retirement benefits.

First-Time Plan Audits: What To Expect

Growing beyond 100 employees is an important landmark in a company’s history. While companies may view crossing this threshold as cause for celebration, the Department of Labor (DOL) may view it as a trigger for increased scrutiny of your employee-benefit plan.

UPCOMING EVENTS AND HAPPENINGS

Key Upcoming Deadlines
December 1: Deadline to deliver QDIA, Auto-Enrollment, and Safe Harbor Notices to participants
December 14: Summary Annual Report due
December 31: Age 70½ Required Minimum Distributions due to participants who have begun receiving distributionsCONTACT:

]]>Mon, 29 Oct 2018 04:00:00 GMT12c4a209-088a-4795-8cfe-de295088c4e1Topic 842, Leases
Updated in 2018, BDO’s Leases Practice Aid provides broad resources and examples to assist lessees, lessors, and practitioners in complying with the leasing standard ASU 2016-021 (“Topic 842” or “the new standard”); issued by the Financial Accounting Standards Board (“FASB” or “the Board”) in 2016, taking effect beginning 2019. Under its core principle, a lessee will recognize right-of-use (ROU) assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. The pattern of expense recognition in the income statement will depend on a lease’s classification.

Lessor accounting remains largely consistent with previous U.S. GAAP, but has been updated for consistency with the new lessee accounting model and with the new revenue standard, ASU 2014-09.2

For calendar-year public business entities the new standard takes effect in 2019, and interim periods within that year; for all other calendar-year entities it takes effect in 2020, and interim periods in 2021.

This publication summarizes the new leasing guidance, including practical examples to assist practitioners. It also includes BDO observations on key concepts, as well as insights into how certain aspects of the new standard compare with prior U.S. GAAP.

]]>Wed, 24 Oct 2018 04:00:00 GMT08c6a010-8b59-4ffb-a25e-093ee74b6a34exemptive order on October 16th providing regulatory relief for anyone[1] that cannot file timely due to Hurricane Michael and its aftermath. The order extends the filing deadline to November 23rd for any filing due during the period from October 10th to November 21st.[2] If a registrant takes advantage of this relief, the filing must disclose why it was unable to file on a timely basis. The order specifies that a registrant taking advantage of this relief will maintain its Form S-3 eligibility.

For purposes of Rule 12b-25, the due date of affected reports is considered to be November 23rd. Therefore, issuers who file a Form 12b-25 by November 24th will receive the additional time permitted by Exchange Act Rule 12b-25 (which is fifteen calendar days for an annual report and five calendar days for a quarterly report) to file the report.

The order provides relief from the proxy and information statement delivery requirements for those delivering materials to the affected areas. The order also waives the auditor independence requirements when auditors assist clients with the reconstruction of any previously existing accounting records that were destroyed as a result of Hurricane Michael.

Other relief was also provided, which is further described in the press release and exemptive order. Registrants are encouraged to contact the SEC staff for any additional relief and interpretive guidance.

[1] The order applies to all publicly traded companies, investment companies, accountants and others who have been impacted by Hurricane Michael.

[2] The SEC adopted interim final temporary rules that grant similar relief to companies that file reports and forms pursuant to Regulation A and Regulation Crowdfunding.

Boards Are Striving to Keep Pace with Digital Transformation and Cybersecurity Imperatives

Technology is fundamentally changing the way we do business, introducing new opportunities and new threats. Succeeding in today’s digital economy requires operating as a digital business. To be on the right side of disruption, digital transformation is essential to survival. The forces behind widespread digitization have put even the most conservative businesses on notice.

Digitization is a key way for organizations to increase profitability, enhance recruitment and employee engagement, encourage retention, and accelerate growth. True digital transformation, however, is a much bigger endeavor and fundamentally can serve as a catalyst for business transformation with proper board oversight. Along with digitalization, comes the increasing need for information governance with a keen focus by directors on mitigating cyber risk and enhancing data privacy protections.“BDO's 2018 Cyber Governance Survey reveals how public company board directors increasingly recognize the competitive advantages of embracing a digital transformation strategy and mitigating vulnerabilities related to cyber risk. Developing a strategic path for an organization's digital transformation and devoting company resources and board oversight to cybersecurity and data privacy are now necessities for businesses to survive and thrive during this time of intense change.”

AMY ROJIK
BDO USA’s National Assurance Partner - Communications and Governance
The 2018 BDO Cyber Governance Survey, conducted annually by the BDO Center for Corporate Governance and Financial Reporting, measures the opinion of public company directors on these issues, as well as other key governance concerns. This year’s survey, conducted in July and August 2018, examines the opinions of 145 corporate directors of public company boards.

Digital Transformation and Disruption Driving New Value

In the world of business, the goals to “disrupt, innovate, and transform” have become daily pursuits of organizations, elevating the role of technology to the top of the board agenda.

Nearly two-thirds (66 percent) of public company board directors say their organization either has a digital transformation strategy in place or is planning to develop one, suggesting that digital transformation initiatives have transcended beyond the sole domain of IT to involve the entire organization. However, while they may be making ad-hoc investments in digital, many businesses have not yet set a digital transformation strategy into motion. About one-third of respondents (34 percent) say their organization has no digital transformation strategy currently and does not intend to develop one in the near future.

"Digital transformation is predicated on foresight: the ability to re-imagine business five years into the future—and then work backwards. Management naturally tends to focus on the short-term, so the board of directors plays a critical role in catalyzing strategic planning for the long-term view. And as the pace of change accelerates, the timeline of ‘long-term’ is shrinking. Organizations that live solely in the present are already operating in the past.”
​MALCOLM COHRON
BDO USA’s National Digital Transformation Services Leader
With or without a concrete strategy in place, boards are taking steps to address technology disruption. Nearly half (45 percent) have increased capital allocation toward digital initiatives; almost three-in-ten (29 percent) have hired board members with relevant oversight skills; and more than a quarter (27 percent) say the board has overseen the development of a digital transformation roadmap. Another 16 percent of board directors have introduced new metrics for enhanced business insight. Meanwhile, nearly one-third (29 percent) of respondents report they have not done any of these to address technology disruption, which may point to organizations overlooking significant opportunities and underestimating critical risks to their business.

The most important digital priority for directors serving on public company boards is investing in innovative digital capabilities for anticipated business needs, cited by 31 percent of survey respondents. This is followed by optimizing operational efficiencies (25 percent) and improving customer experience (21 percent). Only 10 percent of respondents are focused on implementing a change management program—a gap that may stymie business adoption and user enablement.

BDO'S CLOSER LOOK:

Digital transformation can be boiled down to three foundational areas of future value creation: Digital Business, Digital Process, and Digital Backbone. Digital Business is focused on creating new value, market differentiation, and revenue in the digital economy. Digital Process focuses on operational digital re-invention by optimizing end-to-end process performance and improving efficiency. Digital Backbone is the foundation on which all digital initiatives are built, centering on addressing or removing the IT complexities, risks, and barriers to innovation, to meet business and evolving market demands.These fundamental value drivers are interconnected—and will become even more intertwined as your organization becomes increasingly digital. BDO regularly produces resources to keep those charged with governance informed about the latest developments that may impact their business, including this article on how middle market organizations are re-imagining business and operations for the future digital economy: Digital Transformation: The Middle Market Goes “Back to the Future”.

Cybersecurity Continues to be at the Forefront of Boards’ Concerns

For all the doors digital innovation opens, it also invites a host of new threats in the form of increasingly sophisticated cyberattacks, such aszero-day exploits[1] against software flaws, botnets[2] capable of creating IoT “armies” to overwhelm servers, and “cryptojacking,”[3]or the malicious mining of cryptocurrency by breaching systems and siphoning computing power. Hackers are not just stealing data; they are messing with democratic processes, releasing volumes of classified data, and threatening to bring organizations to a standstill. And as the cyber threat environment evolves, organizations will need to evolve their cybersecurity and data privacy programs, with significant oversight from the board.

Common guidance given to the board is that cybersecurity investments should be concentrated on the organization’s most valuable information assets. The problem with this approach is that what the organization deems most valuable may not be the prime target for a would-be-hacker. Instead of (or in addition to) focusing solely on protecting critical data assets or following the basic script of a generic cyber program, threat-based cybersecurity concentrates investments in the most likely risks and attack vectors based on the organization’s unique threat profile. Corporate board members must ensure their organization develops a complete picture of its cybersecurity risks and adopts a threat-based cybersecurity strategy in alignment with an existing enterprise risk management framework.

While nearly eight-in-ten (79 percent) directors surveyed claim they have avoided a data breach or incident in the past two years, public company boards are becoming more involved in cyber oversight, with 72 percent of board members saying the board is more involved with cybersecurity now than they were 12 months ago.

With boards increasingly more involved in discussions around cybersecurity, especially due to regulatory changes and the potential for reputational damage, the cadence of reporting on cybersecurity is increasing, with nearly one-third (32 percent) of board members saying they are briefed at least quarterly on cybersecurity, while 54 percent are briefed at least annually. However, nine percent of boards indicate that they are not being brief on cybersecurity at all. During the initial four years BDO conducted this survey, the percentage of directors reporting no cybersecurity briefings dropped consistently, and during the past year, that number has held steady. We strongly encourage all boards to reflect on potential cybersecurity risks and work with their management teams to foster communications in this area.

In terms of capital investments, three-quarters (75 percent) of directors say their organization has increased its investment in cybersecurity during the past 12 months. This is the fifth consecutive year that board members have reported increases in time and dollars devoted to cybersecurity.

Access to data is becoming increasingly boundary-less, as the scope of information sharing grows with an ever-expanding universe of vendors, contractors, partners, and customers. Striking the right balance between sharing and restricting information is becoming increasingly challenging. Every one of these digital relationships presents new potential attack vectors for bad actors. A majority of directors (73 percent) report their organizations require third-party vendors to meet certain cyber risk requirements, up 30 percentage points from when directors were last polled on this question in 2016. Nearly eight-in-ten (79 percent) companies have an incident response plan in place to respond to potential cyber risks.“Clients, investors, regulators and law enforcement officials expect organizations to be doing everything they can to protect sensitive information. In an environment where a data breach is an inevitability, a successful cybersecurity program is defined by the demonstrable effort made to minimize risk and increase the level of transparency and urgency in mitigating the fallout. The board should think of cybersecurity not only as a matter of compliance, but a matter of corporate ethics and trust.”
​GREGORY GARRETT
BDO USA’s Head of U.S. and International Cybersecurity

BDO'S CLOSER LOOK:

Data privacy regulations are driving more stringent governance requirements. At the center of these regulations is the ability for an organization to understand where its data resides, how it is managed, who can access it, and how it can be defensibly destroyed. Information governance is foundational to e-discovery directly impacting the cost, speed, and soundness of decision-making. Download BDO’s fourth annual Inside E-Discovery & Beyond survey which examines the opinions and insights of more than 100 senior in-house counsel about changes in their approaches to e-discovery, information governance, compliance, and cybersecurity.

In February 2018, the SEC released interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. In response, more than half of board directors indicate their company has conducted readiness testing of cybersecurity risk management programs (58 percent) and implemented new cybersecurity risk management policies or procedures (53 percent). About a third of companies (34 percent) have conducted a formal audit of their cyber risk management program, but just seven percent have leveraged the Center for Audit Quality’s Cybersecurity Risk Management Oversight: A Tool for Board Members. Furthermore, a full quarter of organizations surveyed have taken no steps to address the SEC’s guidance on cyber disclosure obligations. We urge management and board directors to familiarize themselves with such available guidance and tools, if they have not already, in considering and strengthening their cybersecurity risk management program and related cybersecurity disclosures.

"In the wake of this year’s SEC guidance, we’ve seen an uptick in public company requests for independent cyber risk examinations. While the AICPA’s SOC for Cybersecurity Framework is relatively new and strictly voluntary, it addresses a critical gap in standardizing cyber risk reporting. Many of our public company clients anticipate increased regulatory scrutiny of their cyber risk and incident disclosures, and are using the SOC for Cybersecurity reporting framework as a benchmark.”

JEFF WARD
BDO USA’s Third-Party Attestation National Managing Partner

BDO'S CLOSER LOOK:

In BDO’s publication, Introducing SOC for Cybersecurity: Translating Cyber Risk for Every Stakeholder, we highlight the AICPA’s latest reporting framework for cyber risk management, first introduced in April 2017. Organizations can use the framework to design a comprehensive risk-based cybersecurity program, perform a cyber risk assessment and gap analysis, and/or undertake an examination-level attestation engagement.
In Spring 2018, the Center for Audit Quality (CAQ) released a new tool, Cybersecurity Risk Management Oversight: A Tool for Board Members, to assist board members in their oversight of data security and cybersecurity risks and disclosures by providing key questions board members can use in their discussions with management and auditors.

The tool further provides key resources from leaders in the area of cybersecurity. The goal of this tool is two-fold. First, it is intended to better educate board members and others charged with governance and provide discussion starters for them to properly evaluate their cyber risks. Second, it is meant to be a tool for auditors to help them assess how actively involved the board members and others charged with governance are in assessing these risks. BDO continues to provide financial reporting and governance resources, specifically related to cybersecurity, including our insights, events and webinars, website content, and CAQ materials that audit committees may find helpful.

A New Era of Data Privacy

In recent years, the explosion of data has created new, unprecedented business challenges, including increased risk and cost. Regulations are driving more stringent information governance requirements. Central to navigating these regulations is the ability for an organization to understand where its data resides, how it’s managed, who can access it, and how it can be defensibly destroyed.

More than two-thirds (69 percent) of board directors said their company is not impacted by the GDPR. Chances are, many of them are wrong. More muted impact among corporate directors may reflect lack of awareness or misunderstanding that still underlies many aspects of this new regulation. Any U.S. company that deals with the personal data of EU citizens and residents could be subject to the GDPR’s stringent requirements even if the company does not operate in any of the 28 EU member states.

Clearly, there is a lot of confusion about the GDPR, not only because of its extra-territorial scope, but because of the ambiguity in the way it is written. There is a lot of room for interpretation—and a lot of potential downside for a bad interpretation.

Among respondents who say they are impacted, 78 percent report their organizations have conducted a GDPR gap assessment; another 78 percent have implemented or updated privacy notices; and 43 percent have updated their breach notification policies. Just under a third (32 percent) report increasing data privacy budgets, while about one-third (32 percent) have appointed a Data Protection Officer, a requirement under the GDPR for organizations that engage in certain types of data processing activities.

The May 25th deadline to comply with the EU’s GDPR may have come and gone, but the compliance journey is just beginning, as prudent and responsible data privacy governance goes beyond checking the box on implementation day. Data privacy governance is an ongoing process and a commitment to safeguarding personal data and other sensitive data that your organization collects, processes, transfers, or stores. The GDPR is designed with the evolving nature of data privacy in mind, and how it is monitored and enforced will change over time.

Data privacy regulation is also still evolving. The passage of the California Consumer Privacy Act, which goes into effect on January 1, 2020, is the first of what will likely be many new, more stringent rules governing data privacy at the state level. This privacy law contains a broader definition of personal data, establishes broad rights for California residents to direct deletion of data, establishes broad rights to access personal data without certain exceptions, and requires that organizations give consumers the right to know how their data is used and why it is being collected.

"GDPR was a shock to the system in the U.S. But beyond compliance, the regulation has served as a propeller for the U.S. to get privacy safeguards in line with global standards. Now, when boards consider how their organization can keep pace with mounting data-related challenges, their priority should be building a culture of privacy, with cybersecurity and regulatory compliance as components.”

BDO'S CLOSER LOOK:

The EU’s General Data Protection Regulation, also known commonly as GDPR, applies to any organization that transfers data to, from, or within EU borders, impacting organizations in the U.S. and around the world. With the vast amount of data available to and within organizations, it is important to take the proper steps to protect and secure EU personal data to avoid the implications of non-compliance. BDO’s Data & Information Governance professionals want to ensure your organization is taking in account the many ways to protect EU personal data. Download BDO's GDPR Checklist and refer to our September 2018 webinar for an in-depth look at how to mitigate risk for your organization.

The world of corporate directors at publicly traded companies is constantly in flux—never more so than in 2018, as boards face regulatory uncertainty, heightened cybersecurity threats, and disruptive changes in industry dynamics and business models. As overseers, the board must anticipate the rules that have yet to be written. The success of organizations ultimately hinges on having the agility and foresight to evolve and transform.

BDO BOARD SURVEY

These are just a few of the findings of the 2018 BDO Cyber Governance Survey, conducted by the Corporate Governance Practice of BDO USA in July and August 2018. A companion report, the 2018 BDO Board Survey on Corporate Governance and Financial Reporting, explores the board’s role related to corporate governance, financial reporting, tax, sustainability, and diversity. These two annual surveys examine the opinions of corporate directors of public company boards regarding timely and relevant corporate governance and financial reporting issues.

BDO USA’s Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad accounting, tax, risk management, and forensic investigation issues.
For more information, please contact:

[1] Zero-day exploits: Zero-day exploit refers to code that attackers use to take advantage of a zero-day vulnerability. They use the exploit code to slip through the hole in the software and plant a virus, Trojan horse, or other malware onto a computer or device. It's similar to a thief slipping through a broken or unlocked window to get into a house. https://www.wired.com/2014/11/what-is-a-zero-day/

[2] Botnets: Botnets are an army of IoT devices, “robot” and “network.”

The disclosure of changes in shareholders’ equity within a registrant’s Form 10-Q filing is required on a quarter-to-date and year-to-date basis for both the current year and prior year comparative periods. We understand that a registrant may disclose the changes in one of two ways:

Reconcile the changes in two separate schedules detailing the quarter-to-date changes and the year-to-date changes; or

Reconcile the changes in one schedule, detailing the changes in each quarter within the fiscal year.

In light of the effective date of the amendments, some questioned when a registrant would be first required to disclose the changes in shareholders’ equity in its Form 10-Q filing. The staff issued Compliance and Disclosure Interpretation 105.09 noting the staff would not object if a registrant first discloses the changes in shareholders’ equity in its Form 10-Q for the quarter that begins after November 5, 2018.

The following table summarizes the effective dates for various fiscal year ends:

Fiscal Year-End

Disclosure required in the Form 10-Q for the quarter ending:

December 31

March 31, 2019

March 31

June 30, 2019

June 30

March 31, 2019

September 30

March 31, 2019

[1] Refer to our previous Flash Report for further information on other aspects of the amendments.

Summary

The FASB issued ASU 2018-13[1] to improve the effectiveness of disclosures about fair value measurements required under ASC 820.[2] The new ASU is available here, and is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.

Background

The FASB issued ASU 2018-13 as part of its disclosure framework project, which has an objective and primary focus to improve the effectiveness of disclosures in the notes to financial statements. As part of the project, during August 2018, the Board also issued a Concepts Statement,[3] which the FASB used as a basis for amending the disclosure requirements for Topic 820.

Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.

Policy for timing of transfers between levels of the fair value hierarchy.

Valuation process for Level 3 fair value measurements.

For nonpublic entities, changes in the unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

The following disclosure requirements were modified in Topic 820:

In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the reporting entity or announced the timing publicly. If the timing is unknown, the reporting entity shall disclose that fact.

The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, a narrative description of the uncertainty of the fair value measurement from the use of significant unobservable inputs, if those inputs reasonably could have been different at the reporting date, is required.

The following disclosure requirements were added to Topic 820. Nonpublic entities are not required to make these additional disclosures:

For recurring fair value measurements categorized within Level 3 of the fair value hierarchy held at the end of the reporting period, the changes in unrealized gains and losses for the period included in other comprehensive income.

The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) instead of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

Effective Date and Transition Requirements

The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted upon issuance of the ASU. An entity is permitted to early adopt all disclosure requirements in the ASU or early adopt only the removed and modified disclosure requirements, while delaying adoption of the additional disclosures until their effective date.

Upon adoption, the amendments should be applied retrospectively to all periods presented, except the amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

Summary

The FASB issued ASU 2018-14[1] to improve the effectiveness of disclosures for defined benefit plans under ASC 715-20.[2] The ASU applies to employers that sponsor defined benefit pension or other postretirement plans. The ASU is available here, and is effective for public business entities for fiscal years ending after December 15, 2020, and for all other entities, the effective date is fiscal years ending after December 15, 2021. Early adoption is permitted.

Background

The FASB issued ASU 2018-14 as part of its disclosure framework project, which has an objective and primary focus to improve the effectiveness of disclosures in the notes to financial statements. As part of the project, during August 2018, the Board also issued a Concepts Statement,[3] which the FASB used as a basis for amending the disclosure requirements for Subtopic 715-20.

Main Provisions

ASU 2018-14 amends the disclosure requirements applicable to all employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures.

The following disclosure requirements were removed from Subtopic 715-20:

Amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.

Amount and timing of any plan assets expected to be returned to the employer.

The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law.

Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.

For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will now be required to disclose separately the amounts of purchases and any transfers into or out of Level 3 of the fair value hierarchy.

For public entities, the effects of a one-percentage-point change in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic postretirement health care benefit costs and the accumulated postretirement benefit obligation for health care benefits.

An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

ASU 2018-14 also clarifies the disclosure requirements in paragraph 715-20-50-3.

For entities with multiple plans that provide aggregated disclosures, the following information for defined benefit pension plans should be disclosed:

The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.

The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

Effective Date and Transition Requirements

The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.

Upon adoption, an entity should apply the amendments in this ASU on a retrospective basis to all periods presented.

The Employee Retirement Income Security Act (ERISA) allows plan sponsors to maintain spending accounts funded by revenue generated by mutual fund holdings to help pay for the costs of running a 401(k) Plan. While these spending accounts—also known as revenue-sharing accounts, budget accounts, ERISA buckets or plan expense reimbursement accounts—can be helpful in defraying plan expenses, it’s important that plan sponsors understand the details of revenue-sharing agreements and the fiduciary responsibilities they entail.

This can be a challenge, especially for smaller plans. Not only do many plan sponsors not fully understand the mechanics of how spending accounts work, it’s not uncommon for administrators to not even realize that the funds they offer have revenue-sharing agreements. This can cause sponsors to neglect their fiduciary duty to track and provide transparency for funds in spending accounts and how that revenue is used—opening the plan up to lawsuits by plan participants.

To help clear up this confusion, we answer some of the most common questions that plan sponsors have about ERISA spending accounts.

What Is an ERISA Spending Account?

To understand ERISA spending accounts, it’s important to know how the revenue is generated. Some investment options—usually mutual funds—offer rebates or paybacks for using their investment funds. The payback is built into the expense ratio for the fund and is returned to the recordkeeper. In turn, the recordkeeper takes its fee for hosting the mutual fund and then the remainder goes into a revenue-sharing account that is directed by the plan sponsor to either pay for plan expenses or be allocated as earnings to participants with 401(k) accounts

Often, plan sponsors are not aware that they have a revenue-sharing account, or they think that the recordkeeping is free. This is mostly because recordkeeping fees are taken out of the fund’s earnings (or the expense ratio).

What Can the Account Pay For?

Typically, funds in the ERISA spending account are allocated as earnings to the participant with a 401(k) Plan balance or are used to pay other 401(k) Plan operational expenses, including:

Audit fees

Third Party Administration services including annual discrimination testing

Transactional expenses, such as calculating hardship, QDRO and loan expenses

Legal and other annual professional fees

The account can’t pay settlor fees, amendment to plan fees or costs associated with adding voluntary features to the plan. In addition, ERISA spending account balances can’t be carried over to the next plan year.

What Happens to Excess Revenue?

If there is excess revenue in the account after these expenses are paid, plan sponsors typically return it to participants. The plan document should outline how excess revenue is distributed to participants. Some plans distribute it to all participants while other plans distribute it only to participants who invest in funds with revenue-sharing agreements.

Should My Plan Have an ERISA Spending Account?

When selecting any investment option to be included in a plan, sponsors need to ensure that the fees for the investment funds are reasonable. This is a fiduciary decision that plan sponsors make for all funds, regardless of whether they offer spending accounts. In some cases, including a fund with higher expenses and revenue-sharing may be completely justified by the fund’s expected returns or other factors.

Today, only 27 percent of plans have ERISA spending accounts, according to the Plan Sponsor Council of America’s 60th Annual Survey of Profit Sharing and 401(k) Plans. In addition to the rising popularity of exchange-traded funds (ETFs), index funds and other lower-cost investment vehicles that typically don’t offer revenue sharing, another reason that plan sponsors are moving away from this approach are the rules related to transparency and documentation when selecting funds.

Plan sponsors using spending accounts should clearly document the reasons for choosing funds that offer revenue sharing. Several lawsuits have come before federal courts where participants have charged that investments that provide revenue sharing were not in their best interest.

BDO Insight: Know Your Responsibilities for Spending Accounts

Navigating the complexities of asset managers, funds and share types to decide which investment options to include in a company’s retirement plan can be a daunting process. Spending accounts and the widespread confusion about how they work only adds to the challenge.

Even though spending accounts are declining in popularity, they shouldn’t be an afterthought for plans’ investment committees. That is why it’s important for plans to work with investment advisors who have experience working with these types of arrangements. At a minimum, plan sponsors need to understand the mechanics of any revenue-sharing agreement they enter into and be able to justify why the fund’s fees are reasonable. Sponsors also need to understand their responsibilities for tracking and distributing excess revenue.

It’s important to revisit fee arrangements when adding a new investment or changing service providers. Plan sponsors are required to be aware of fees being paid—even costs paid directly by participants. There are no “free” services, so plan sponsors with ERISA spending accounts need to frequently determine whether this strategy provides value to the plan and its participants.

While this can be a complicated topic, your BDO representative can help you better understand how ERISA spending accounts may impact your 401(k) plan.

Summary

The FASB issued ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, to improve, simplify and enhance the financial reporting of long-duration contracts issued by insurance companies. That is, the standard has no impact to noninsurance companies. The new ASU is available here, and the effective date for public companies is for fiscal years beginning after December 15, 2020. For all other companies, the ASU is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted.

Background

The FASB issued ASU 2018-12 with the objective of making targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The changes apply to insurance companies that issue long-duration contracts such as life insurance, disability income, long-term care and annuities. The changes do not apply to policyholders or noninsurance companies.

Main Provisions[1]

Area

Prior to ASU 2018-12

Targeted Improvements

Liability for Future Policy Benefits

Original assumptions used to measure the liability for future policy benefits are locked at contract inception and held constant over the term of the contract. The liability includes a provision for risk of adverse deviation, and assumptions are unlocked if a premium deficiency arises.

An unobservable discount rate (a rate based on an insurance entity’s expected yield on its invested assets) is used to discount future cash flows.

The liability for future policy benefits for nonparticipating traditional and limited-payment contracts will be required to be updated for changes in assumptions. Cash flow assumptions will be reviewed and updated as necessary, at least annually, with changes reflected separately in net income. Discount rate assumptions will be updated each reporting period with changes reflected in other comprehensive income.

The liability will be discounted at an upper-medium grade (low-credit-risk) fixed-income instrument yield that reflects the characteristics of the liability rather than the invested assets.

Measurement of Market Risk Benefits

Certain market-based options or guarantees associated with deposit (or account balance) contracts share common risk characteristics that expose an insurance entity to capital market risk. However, there are two different measurement models (a fair value model and an insurance accrual model).

Market risk benefits will be measured using a single measurement model (fair value), with the effect of changes in the insurance entity's credit risk recognized in other comprehensive income.

Deferred Acquisition Costs (DACs)

Multiple amortization methods exist, some of which are complex and require numerous inputs and assumptions.

DACs will be amortized on a constant-level basis over the expected term of the contract. DACs will be written off for unexpected contract terminations but will not be subject to an impairment test.

Disclosures

There are limited requirements to disclose information about long-duration contracts.

Several new disclosures will be required, including liability rollforwards and information about significant inputs, judgments, assumptions and methods used in measurement, and the effect of those changes on measurement.

Effective Date and Transition

The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.

Changes to the liability for future policy benefits and DACs will apply to all outstanding contracts based on their existing carrying amounts at the beginning of the earliest period presented, subject to certain adjustments. An insurance entity will have the option to apply the changes retrospectively using actual historical experience information as of contract inception. This option will be elected at the contract issue-year level and applied to all contract groups for that issue year and all subsequent issue years. Market risk benefits will be measured at fair value at the beginning of the earliest period presented, with the cumulative effect of the changes in the insurance entity’s credit risk recognized in accumulated other comprehensive income, while the difference between fair value and carrying value (excluding the effect of credit risk changes) recognized in the opening balance of retained earnings.

Summary

The FASB issued ASU 2018-151[1] to align the requirements for capitalizing implementation costs for hosting arrangements (services) with costs for internal-use software (assets). As a result, certain implementation costs incurred in hosting arrangements will be deferred and amortized. The new ASU is available here, and the effective date for public companies is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted.

Background

The FASB previously issued ASU 2015-052[2] to clarify whether a hosting arrangement3 includes a license to internal-use software. If the arrangement[3] contains a software license, the customer should account for that element in accordance with Subtopic 350-404[4] (i.e., generally capitalize and subsequently amortize the cost of the license, and recognize a liability for future payments associated with the software element). If the arrangement does not contain a software license based on those criteria, the customer should account for the arrangement as a service contract (i.e., expense fees as incurred). For additional information on ASU 2015-05, refer to BDO’s Alert.

In response to ASU 2015-05, stakeholders requested additional guidance on accounting for implementation costs associated with hosting arrangements that do not contain a software license and, therefore, are considered service contracts. The absence of guidance on such implementation costs led to diversity in practice regarding whether an entity capitalized and amortized such costs or reflected them as an expense when incurred.

The FASB issued ASU 2018-15 to address that diversity. The accounting for the hosting fees associated with the hosting arrangement is not affected by this ASU and, accordingly, the hosting fees are expensed as the service is provided.

Main Provisions

The amendments of ASU 2018-15 require a customer in a hosting arrangement that is a service contract to apply the guidance on internal-use software to determine which implementation costs to recognize as an asset and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized under Subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. The amendments require a customer in a hosting arrangement that is a service contract to determine whether an implementation activity relates to the preliminary project stage, the application development stage, or the postimplementation stage. Costs for implementation activities in the application development stage will be capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages will be expensed immediately.

As such, certain costs in the application development phase will be deferred and amortized over the term of the hosting arrangement. That term begins when the module or component of the hosting arrangement is ready for its intended use and includes the noncancellable period of the arrangement plus periods covered by:

an option to extend the arrangement if the customer is reasonably certain to exercise that option;

an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option; and

an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor.

An entity that has capitalized implementation costs under this new guidance will apply existing impairment guidance in Section 360-10-35 to the capitalized implementation costs as if the costs were long-lived assets. An entity also will apply the abandonment guidance in paragraphs 360-10-35-47 through 35-49 to the capitalized implementation costs related to each module or component when it ceases to be used.

ASU 2018-15 also provides guidance regarding the presentation of implementation costs for a hosting arrangement that is a service contract. The guidance clarifies that the capitalized implementation costs are not longlived assets, which is reflected in the presentation guidance summarized in the following table:

Financial Statement

Presentation

Balance Sheet

Present capitalized implementation costs in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

Income Statement

Reflect expense related to the capitalized implementation costs in the same line item as the fees associated with the hosting element (service) of the arrangement. Accordingly, amortization expense related to those implementation costs cannot be presented along with depreciation or amortization expense for PP&E and intangible assets if such depreciation or amortization is presented separately in the income statement.

Statement of Cash Flows

Classify payments for capitalized implementation costs consistent with payments made for fees associated with the hosting element.

An entity must provide disclosures related to capitalized implementation costs of a hosting arrangement that is a service contract consistent with those required for internal-use software, and also should make the disclosures in Subtopic 360-10 as if the capitalized implementation costs were a separate major class of depreciable asset.

Effective Date and Transition

The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period, for all entities.

The amendments should be applied prospectively to all implementation costs incurred after the date of adoption or retrospectively. Transition disclosures depend on the transition method selected.
For questions related to matters discussed above, please contact:

[1] Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

[2] Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
[3] ASU 2018-15 updated the definition of ‘hosting arrangement’ as follows: In connection with accessing and using software products, an arrangement in which the customer of the software does not currently have possession of the software; rather, the customer accesses and uses the software on an as-needed basis.
[4] Intangibles—Goodwill and Other—Internal-Use Software]]>Mon, 24 Sep 2018 04:00:00 GMT263f2d6c-8352-4a55-9643-94d22efde7cbexemptive order on September 19th providing regulatory relief for anyone[1] that cannot file timely due to Hurricane Florence and its aftermath. The order extends the filing deadline to October 29th for any filing due during the period from September 14th to October 26th.[2] If a registrant takes advantage of this relief, the filing must disclose why it was unable to file on a timely basis. The order specifies that a registrant taking advantage of this relief will maintain its Form S-3 eligibility.

For purposes of Rule 12b-25, the due date of affected reports is considered to be October 29th. Therefore, issuers who file a Form 12b-25 by October 30th will receive the additional time permitted by Exchange Act Rule 12b-25 (which is fifteen calendar days for an annual report and five calendar days for a quarterly report) to file the report.

The order provides relief from the proxy and information statement delivery requirements for those delivering materials to the affected areas. The order also waives the auditor independence requirements when auditors assist clients with the reconstruction of any previously existing accounting records that were destroyed as a result of Hurricane Florence.

Other relief was also provided, which is further described in the press release and exemptive order. Registrants are encouraged to contact the SEC staff for any additional relief and interpretive guidance.

[1] The order applies to all publicly traded companies, investment companies, accountants and others who have been impacted by Hurricane Florence.

[2] The SEC adopted interim final temporary rules that grant similar relief to companies that file reports and forms pursuant to Regulation A and Regulation Crowdfunding.

]]>Thu, 13 Sep 2018 04:00:00 GMT9732cfea-4ff1-4069-a9de-d804ea34a662
Going through an audit for the first time can be a daunting task. Your auditor will ask for information you might expect, such as employee census and payroll data, plan documents, plan financial statements, contribution deposit history, and more. What you might not expect is getting requests for that information from previous years, or for a sample of participants over a certain timeframe to check for past errors. It’s a lot of data to supply, so keeping good records and planning ahead is paramount. A solid auditor with benefit plan audit experience can be extremely helpful in guiding plan sponsors through the first-time process.

Understanding the 100-Participant Threshold

Generally, when a plan has 100 or more eligible participants, it’s considered a “large plan” for reporting purposes, which requires an annual examination from an IQPA. The audit must be included in the plan’s annual report – filed with the DOL on a Form 5500 – and is due within seven months of the end of the plan year. It may be extended to nine and one half months of the end of the plan year.

While 100 participants is the general threshold for large-plan status, the DOL does provide some wiggle room. Plans that have between 80 and 120 eligible participants at the beginning of the plan year are allowed to file their Form 5500 in the same way they did the year prior. For example, a plan that had 70 participants on January 1, 2017 and filed as a small plan for 2017, and then grew to 115 participants by January 1, 2018, may elect to file as a small plan again—and avoid an audit—for the 2018 plan year. An audit would not be triggered in this example until the eligible participants exceeded 120 as of the first day of the Plan year.

It’s important to understand how to count plan participants by beginning with the definition of eligible participant as outlined in your plan document. The qualification may include age or service requirements, so it’s important to keep good records for those criteria. For 401(k) plans, the number of eligible active employees are counted even if they have never elected to participate and don’t have an account. Former employees who have left their 401(k) funds in the plan are also included in the participant count. The participant count for welfare benefits are less inclusive than for 401(k) plans because an employee must elect and make any required payments for coverage in order to be considered a participant.

What To Expect

To ensure a smooth process, plan sponsors should anticipate the auditor’s requests and gather certain plan records in advance of the auditor’s visit. Often, the plan’s record keeper or third-party administrator can assist or provide the necessary information, including:

Agreements with service providers, especially record keeper and plan custodian

Plan committee minutes

Documentation of the plan’s internal control processes

Employee census (list of all paid employees for the year including key demographic data)

Payroll records

A listing of contributions remitted to the trust, by pay period

Trust and recordkeeping reports

Independent appraisal for company stock or other non-traditional investments held by the 401(k)

Distributions, loans or other plan activity

Proof of insurance coverage for employee crime (fidelity bond)

Prior Form 5500 filings

Remember, your auditor works outside your company and needs to get a good understanding of how your plan works. It’s important to offer full disclosure of any issues related to the plan, such as operational errors or contributions remitted late to the plan. Just like the plan sponsor has a fiduciary duty, the auditor’s job is to protect the interests of the participants by ensuring the plan is operated in accordance with the plan document and the laws that govern qualified plans. During the process the auditor might identify issues that put the plan’s qualified and tax exempt status in jeopardy if not fixed. While beyond the scope of an independent audit, a knowledgeable auditor can help the plan sponsor understand how to avoid the same mistake in the future and formulate a plan of action including an introduction to a tax specialist that can help you utilize a variety of IRS and DOL programs to fix any issues the plan might have.

Your auditor may prepare a draft of the report or review a draft prepared by plan management. It should include financial statements and related footnote disclosures, as well as supplemental information as required by the DOL. After you approve the report, the auditor will give you a formal copy, which will be attached to the Form 5500 by the person responsible for E-filing the annual report.

BDO Insight: Plan Ahead and Find the Right Auditor

The DOL can reject your 5500 if it finds errors in the audit report, which may result in fines or other severe penalties. Three years ago, the DOL evaluated the quality of audit work being performed on employee benefit plans by independent qualified public accountants and found that nearly 40 percent of audits had major errors that would cause the department to reject a company’s Form 5500.

As a plan fiduciary, it’s critical to work with a competent, experienced independent auditor—especially if you’re going through an audit for the first time. Although the audit process may seem daunting, it can go smoothly with a little bit of planning and organization. Even if your plan hasn’t crossed the 100-participant threshold yet, it’s never too early to start strengthening your record-keeping systems and thinking about what information you may need to provide down the road. In the end, the audit helps strengthen benefit plan policies and processes.

The world of corporate directors at publicly traded companies is constantly in flux—never more so than in 2018, as boards face regulatory uncertainty, significant tax law changes and greater focus on holistic tax planning, disruptive changes in business models and intense scrutiny of board diversity and composition.

The 2018 BDO Board Survey, conducted annually through the BDO Center for Corporate Governance and Financial Reporting, measures the opinion of public company directors on these issues, as well as other key governance concerns. This year’s survey, conducted in July and August 2018, examines the opinions of 140 corporate directors of public company boards.​“Public company board directors see recent tax law changes as positively impacting their company, but many are taking a ‘wait and see’ approach to launching new business initiatives, as they look to develop a more thorough understanding of their business’ total tax liabilities. Directors remain confident in the use of non-GAAP measures in financial reporting, and believe their boards are on a positive track with regard to addressing board diversity."

AMY ROJIK
National Assurance Partner, Communications and Governance

Tax Reform: High Expectations Meet Reality

2018 has seen the most significant changes to United States tax laws in a generation, and while the full impact of the changes wrought by the Tax Cuts and Jobs Act of 2017 is still being determined, public company board members have an inside look at how their companies have been affected.

A majority (61 percent) of public company board members note a favorable or highly favorable impact, while 39 percent say the tax law changes had no impact at all on their business. That’s in contrast to the optimism shown last year, when an overwhelming majority (94 percent) of public company board members anticipated changes to tax law would have a favorable impact on their business. More muted optimism among corporate directors now that the tax reform has become reality may reflect the uncertainty that still underlies many aspects of tax reform—especially with a potential second round of tax reforms already on the horizon.

When asked what actions their business has taken as a result of the new U.S. tax law, many public company board members report reinvesting in the business via increasing capital investment (17 percent), increasing employee wages (14 percent) and pursuing a merger or acquisition (11 percent). Smaller percentages focus on returning gains to shareholders through increasing dividends and initiating stock buy-backs. The majority (64 percent) of public company board directors, who report taking no actions to date, may benefit from taking a phased approach to acting on tax reform: determining and addressing any immediate to-dos, navigating key steps to implementing any changes, and finally, ensuring their tax department is equipped to grow and address futures changes.

BDO's Closer Look

Congress and the Trump Administration have already begun consideration of Tax Reform 2.0, including further legislative or regulatory actions to make permanent the short-term provisions of the 2017 tax law changes, among other adjustments to the tax code. BDO regularly produces resources, including this Tax Reform Planning Checklist, designed to keep you informed on the latest developments that may impact your businesses.

To learn more, visit BDO’s Tax Reform hub for a broad range of resources featuring the latest intelligence from BDO tax professionals. Perspectives from tax business leaders on the ground are also captured in BDO’s 2018 BDO Tax Outlook Survey.

Time to Track Total Tax Liability

Given the U.S. tax law changes in 2018 and the growing complexity of global tax regimes, seemingly small changes in corporate strategy can have significant consequences to the business’ total tax liabilities across jurisdictions. For public company board members, understanding the company’s total tax liability and monitoring how well management is mitigating this risk, including all of its various tax dynamics, is critical.

Regardless of whether their company is undertaking changes as a result of the new U.S. tax law, corporate board members must ensure their company has developed a complete picture of its tax liability, factoring in income, property, excise and other taxes, as well as credits, incentives and deductions at the international, federal, state and local levels. Among board members surveyed, only 44 percent have a strong understanding of their organization’s total tax liability and how it impacts the company’s tax strategy.

“While tax reform continues to make headlines in the U.S., it’s just one part of a complex set of tax issues facing businesses across all industries. Getting a grasp on total tax liability is the next great challenge and opportunity for many companies—understanding where tax costs arise across the entire business and developing strategies to minimize the impact on the bottom line. Leading businesses will consider tax from a holistic perspective and use data-driven insights to develop comprehensive tax solutions."

MATTHEW BECKER
National Tax Managing Partner

As companies look to explore new tax strategies to survive and thrive during this time of intense change, board members can help the business avoid bumps in the road by proactively tackling tax risk and opportunities at the earliest juncture, and by re-evaluating strategies regularly, as the tax landscape continues to shift. As good governance practice, directors are strongly encouraged to reserve time to engage with company management and tax advisors on an ongoing basis.

Boards Seek Auditor Review of Non-GAAP Measures and KPIs

As public company business models shift in response to technological changes, organizations are seeking additional ways to provide insights into operations, financial position and liquidity—beyond what is required by statute. Many companies have turned to non-GAAP financial measures as a way to showcase these results. From measures such as “adjusted EPS” to “community-adjusted EBITDA,” organizations are pressing the case to investors that GAAP metrics don’t necessarily capture the true performance of the business. While these non-GAAP measures are increasingly making an appearance in company financial reports, they also remain an area of focus for regulators and stakeholders.

When asked if they believe additional guidance from regulators on non-GAAP and other key performance indicator (KPI) metrics in their financial statements is necessary, more than three-quarters (76 percent) of corporate board directors say no.

When asked if auditor involvement would promote higher investor confidence in non-GAAP measures, however, a majority (55 percent) of public company directors say that it would, suggesting that boards believe a greater level of transparency, consistency and comparability in these measures would be beneficial to investors and others to understand a company’s results of operations, financial position or liquidity.

“Technologies from blockchain to artificial intelligence (AI) are fueling new and evolving business models and driving the emergence of new ways to track and monitor company progress toward strategic goals. Auditors must adapt their approach and analysis to respond to this disruptive trend and provide independent insights on these new metrics that help drive quality and trust."

PHILIP AUSTIN
National Assurance Managing Partner, Auditing

BDO's Closer Look

The Center for Audit Quality (CAQ) released a new tool, Non-GAAP Measures – A Roadmap for Audit Committees, as a culmination of stakeholder roundtables designed to solicit discussions around the usefulness and challenges of using Non-GAAP financial measures, and to identify opportunities to enhance public trust and confidence in such measures. This tool and others have been designed by the CAQ with significant input from stakeholders and serve as valuable resources to audit committees in the execution of their oversight duties and increasing transparency, consistency and reliability within the financial reporting chain.

Sustainability Reporting Takes a Back Seat in 2018

Institutional investors and asset managers serving large and mid-market companies continue to push for greater board accountability and focus on sustainability metrics—as evidenced by Northern Trust’s proxy voting guidelines promoting energy efficiency, Trillium Asset Management’s push in favor of greenhouse gas emissions reporting, and Vanguard’s renewed focus on sustainability. But while sustainability disclosures were a priority for public company board members in our 2017 survey—a stark reversal from 2016—this year’s results show the focus on sustainability has perhaps been put on the back burner…for now. When asked whether disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment decisions, a majority (74 percent) of public company board directors surveyed say no.

The shift in focus this year may be attributable, at least in part, to a lesser focus, politically speaking. Last year, our survey corresponded with the significant spotlight on President Trump’s 2017 decision to pull the U.S. out of the Paris Climate Accord along with a notable proposal approved by Exxon shareholders requiring Exxon to measure and disclose how regulations to reduce greenhouse gases and new energy technologies could impact the value of its oil assets.

Historically, sustainability reporting has been largely undertaken by large, multinational companies. But as the pace of change and availability of instant data continues to drive toward a more globally conscious economy, companies of all sizes may feel more intense pressures to publicly address what they are doing to promote good environmental, social and corporate governance (ESG) practices within their organizations.

BDO’s Closer Look

Sustainability reporting goes beyond emissions and environmental policies. In BDO’s 2018 Shareholder Meeting alert, we highlight certain significant international regulations and evolving sustainability reporting frameworks that are garnering attention, along with activities being undertaken domestically by the U.S. Sustainability Accounting Standards Boards (SASB) to encourage corporate sustainability disclosures that are material, comparable and decision-useful for investors.

Additionally, in our Shareholder alert, we cited the prominence and growing support of the #MeToo movement in the media and actions being taken by leading companies across multiple industries to stamp out “bad behaviors” and “turning blind eyes to such” by executives and others. One of the tangible results of this focus is the demand by stakeholders for corporate governance accountability and pressuring of the board to demonstrate clear focus on establishing the correct tone and culture at the top of the organization. With these and other examples of ESG concerns on the rise, we would encourage boards to remain vigilant and consider these issues more fully.

Boards Focus on Diversity and Overboarding

The SEC had begun to look into company disclosures of the ethnic, racial and gender composition of public company boards more than a year ago, considering whether to make such disclosures a mandatory requirement. More recently, BlackRock, the world’s largest money manager, stated that companies in which it invests should have at least two women on their boards. When asked if their board was addressing the issue of board diversity, more than eight-in-10 (81 percent) directors say yes—a marked increase from 2017, when only 66 percent of respondents said the same.

Still, nearly one-fifth (19 percent) of directors believe their board has room to grow on this measure, and only 33 percent of directors say their board uses formal diversity reviews to address the topic of board diversity.

With the backdrop of a rapidly evolving business world and competitive disruptors all around us, board composition is becoming increasingly more important to the health of the organization. Board diversity extends beyond consideration of gender and affords board members the opportunity to truly drive board composition with diversity in thought and experience to generate innovative thinking and be proactive to the changing influences on the business. Digital transformation and the broad impact of technology on business models has made it more important than ever to have directors that take seriously their role in helping companies adapt and thrive.

To encourage board refreshment and address the issue of board composition, 76 percent of companies surveyed use skill set reviews to ensure director expertise remains relevant, and one-third (33 percent) use diversity reviews to better reflect the gender, age and racial mix of the company’s audience. A smaller amount (14 percent) may additionally achieve board refreshment through imposing tenure limits on its board members.

Beyond diversity, boards are also re-evaluating board service limitations. Proxy advisor firms ISS and Glass Lewis have shone a spotlight on the time commitment and focus required to successfully serve on a public company board, with both companies issuing guidance opposing the nomination of non-executive directors with more than five board seats. Just four percent of public company board members surveyed this year feel this figure should be higher, and nearly three-quarters (73 percent) think directors should be limited to four seats or fewer. Yet only 27 percent of directors say their company sets strict limits on the overall number of boards on which a director can serve.

The topic of board diversity and service limits should continue to be a top focus for corporate board directors, as both are likely to become increasingly prominent as changing business landscapes and other disruptive market drivers push company boards to become proactive in addressing these issues.

BDO’s Closer Look

BDO urges directors to review proxy voting guidelines issued by proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis that have specific recommendations on board composition, among other governance matters. We further urge directors to consider expanding their use of board refreshment tools to include robust skill sets reviews reflective of changing business environments, overboarding considerations, tenure limitations, and composition reviews that align diversification in thought and independence requirements to best meet the needs of corporate strategy and stakeholder expectations.

BDO Board Survey

These are just a few of the findings of the 2018 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA in July and August 2018. A companion report, the 2018 Cyber Governance Survey, explores the board’s role related to cybersecurity, information governance and digital transformation. These two annual surveys examine the opinions of corporate directors of public company boards regarding timely and relevant corporate governance and financial reporting issues.

]]>Fri, 07 Sep 2018 04:00:00 GMTf465009c-2a16-4b1d-809b-d4890b9c3afcadopting release and the demonstration version of the amendments are available on the SEC’s website. The amendments become effective 30 days following their publication in the Federal Register.

Background

The rulemaking is part of the SEC’s Disclosure Effectiveness Initiative, an ongoing broad-based staff review of the SEC’s disclosure rules to consider ways to improve the requirements for companies and investors. The amendments also aim to fulfill the Commission’s responsibility under the FAST Act to eliminate provisions of Regulation S-K that are duplicative, outdated, or unnecessary for all filers.

Nature of the Amendments

Certain disclosure requirements in Regulations S-K and S-X have become outdated, redundant, overlapping or superseded in light of developments in U.S. GAAP, IFRS, other SEC disclosure requirements, and changes in the information environment. The changes made are intended to simplify the overall compliance process, but not change the mix of information provided to investors.

While the changes are voluminous, many of them are not substantive. Some changes merely clean up the terminology used in the rules. For example, S-X 3-02 was modified to reference the statements of comprehensive income instead of the statements of income. Other changes remove requirements that are duplicative with other SEC or GAAP disclosure requirements. For example, S-K 101(b) was deleted as it required disclosure of segment financial information, restatement of prior periods when reportable segments change, and discussion of segment performance that may not be indicative of current or future operations. Such disclosures are similar to those required by ASC 280 and S-K 303(b). The requirement to provide a computation of earnings per share in S-K 601(b)(11) was also deleted because such disclosure is already required by ASC 260.

Other amendments remove requirements that are simply outdated. For example, the requirement in S-K 503(d) and related forms to provide a ratio of earnings to fixed charges when an offering of debt securities is registered was eliminated. The Commission believes this requirement is no longer relevant or useful. Additionally, the requirement in S-K 201 to disclose the high and low stock prices for each quarter over the last two fiscal years was eliminated because such information is widely available.

In connection with the release, the Commission also referred certain disclosure requirements which overlap with U.S. GAAP but provide incremental information to the FASB for potential incorporation into U.S. GAAP. Examples include:

Incremental income tax disclosures required by S-X 4-08(h) – e.g., disclosing the amount of domestic and foreign pre-tax income and income tax expense, and

Information about major customers required by S-K 101 – e.g., disclosing a customer’s name in certain instances and removing the bright-line threshold (10%) for disclosure.

The FASB has 18 months from the date the amendments are published in the Federal Register to complete its consideration of whether the referred items will be added to its agenda for potential standard setting.
For questions related to matters discussed above, please contact:

]]>Tue, 28 Aug 2018 04:00:00 GMT6641dc0d-a1f6-467c-b41d-9ca426157194Request for Comment on the Effectiveness of Financial Disclosures about Entities Other Than the Registrant[1] published in September 2015. The proposed changes are intended to better align the financial reporting requirements with the needs of investors by providing them with information that is material and easier to understand. They are also intended to reduce the costs and burdens to registrants, thereby encouraging them to conduct more offerings on a registered basis.

Background

Rule 3-10(a) states the general rule that every issuer of a registered security that is guaranteed[2] and every guarantor of a registered security must file the financial statements required for a registrant by Regulation S-X. The rule also sets forth five exceptions to this general rule. Each exception specifies conditions that must be met. If the conditions are met, separate financial statements of each qualifying subsidiary issuer and guarantor may be omitted, but the parent company must provide certain “Alternative Disclosures.”

The form and content of the Alternative Disclosures are determined based on the facts and circumstances and can range from a brief narrative to highly-detailed condensed consolidating financial information.

Subsidiary issuers and guarantors that are permitted to omit their separate financial statements under Rule 3-10 are also automatically exempt from Exchange Act reporting under Exchange Act Rule 12h-5. The parent company, however, must continue to provide the Alternative Disclosures for as long as the guaranteed securities are outstanding.

Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant. Although affiliates whose securities are pledged as collateral are not registrants with respect to the collateralized security and are not generally subject to the related reporting requirements, existing Rule 3-16 requires financial statements as if the affiliates were registrants.

Summary of Proposed Amendments

Following is a summary of the significant proposed changes. The proposing release can be found here on the SEC’s website. Comments should be provided within 60 days following publication of the release in the Federal Register.

Rule 3-10
The proposed amendments would continue to follow the approach of permitting issuers to omit separate financial statements of subsidiary issuers and guarantors when certain conditions are met. However the conditions and the required Alternative Disclosures would change. The proposed amendments would:

Require disclosure of any quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security.

Amend the condition that each subsidiary issuer or guarantor must be 100% owned by the parent company to omit its separate financial statements. The proposed rule would require that the subsidiary issuer or guarantor be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards.

Require summarized financial information for the issuers and guarantors, which may be presented on a combined basis.[3] The summarized financial information would be required for only the latest year and subsequent interim period. This would replace the current requirement to provide condensed consolidating financial information for all periods presented in the consolidated financial statements.

Require expanded qualitative disclosures about the guarantees and the issuers and guarantors.

Permit the Alternative Disclosures to be provided outside the footnotes to the financial statements (such as in in MD&A) in the registration statement covering the offer and sale of the subject securities and any related prospectus as well as in Exchange Act reports required to be filed shortly thereafter. Subsequently, the Alternative Disclosures would need to be provided in footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements.

Permit a registrant to stop providing the Alternative Disclosures when the issuers and guarantors no longer have an Exchange Act reporting obligation with respect to the guaranteed securities, rather than requiring them for as long as the guaranteed securities are outstanding.

Rule 3-16
The proposed amendments would replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliate(s) and the collateral arrangement. The financial disclosures would consist of summarized financial information similar to that to be provided by issuers and guarantors of guaranteed securities discussed above.

[1] Further information regarding the Request for Comment can be found here in our Flash Report. Our comment letter can be found here.

[2] A guarantee of a debt or debt-like security (“debt security”) is a separate security under the Securities Act and, as a result, offers and sales of these guarantees must be either registered or exempt from registration. If the offer and sale is registered, the issuer of the debt security and the guarantor must each file its own audited annual and unaudited interim financial statements required by Regulation S-X. Additionally, the offer and sale of the securities pursuant to a Securities Act registration statement causes the issuer and guarantor to become subject to reporting under Section 15(d) of the Exchange Act. Reporting under Section 15(d) requires filing periodic reports that include audited annual and unaudited interim financial statements for at least the fiscal year in which the related Securities Act registration statement became effective.

[3] The summarized financial information required would be that defined in Rule 1-02(bb) of Regulation S-X. This rule defines summarized financial information as “the presentation of summarized information as to the assets, liabilities and results of operations of the entity for which the information is required. Summarized financial information shall include the following disclosures: i. Current assets, noncurrent assets, current liabilities, noncurrent liabilities, and, when applicable, redeemable preferred stocks and noncontrolling interests (for specialized industries in which classified balance sheets are normally not presented, information shall be provided as to the nature and amount of the majority components of assets and liabilities);

ii. Net sales or gross revenues, gross profit (or, alternatively, costs and expenses applicable to net sales or gross revenues), income or loss from continuing operations before extraordinary items and cumulative effect of a change in accounting principle, net income or loss, and net income or loss attributable to the entity (for specialized industries, other information may be substituted for sales and related costs and expenses if necessary for a more meaningful presentation).”

]]>Wed, 15 Aug 2018 04:00:00 GMT07713d88-f6c9-4d05-8187-5f26fd9f3d17
Forfeitures are generated when an employee is terminated before the employer’s contributions to their qualified retirement account have fully vested and cannot be returned to the employer. Forfeitures must remain in the plan to be allocated under a forfeiture formula, used as an employer contribution or pay plan expenses. However, under the prior rules, employers could not use forfeitures to fund QNECs and QMACs.

QNEC and QMAC are commonly used by employers to correct testing failures where the rules that limit the disparity between average deferrals and matching contributions of highly compensated employees and non-highly compensated employees are not satisfied. Under the corrective contribution rules, QNEC and QMAC contributions must be fully vested which prohibited the reallocation of forfeitures as QNECs and QMACs since those amounts were not fully vested when contributed.

Under the new regulations, forfeitures can be used for QNECs and QMACs as long as the forfeitures are vested when allocated to the plan participants' accounts although they are not fully vested when contributed to the plan. The use of forfeitures to fund QNECs and QMACs is a valuable expansion that plan sponsors and service providers had been advocating.

Rules around QNECs and QMACs were also expanded by Congress through the Bipartisan Budget Act of 2018 (P.L. 115-123) passed in February 2018. The funds eligible for a section 401(k) hardship withdrawal were broadened to include earnings on elective deferrals as well as QNECs, QMACs, and the associated earnings of both, elective for plan years after December 31, 2018.

These rules coupled with the relaxed hardship withdrawal rules from this year’s earlier budget bill, plan sponsorship becomes even more attractive to employers.CONTACT:

]]>Tue, 14 Aug 2018 04:00:00 GMTcafa5b4c-7f59-419c-981a-29dbfc4b5488
One of the reasons that companies, especially smaller ones, are hesitant to offer a 401(k) plan is that setting one up may seem like an intimidating process. There is a litany of rules to understand and comply with, as well as forms that must be filed and decisions that need to be made. Then, once the plan is established, there are additional annual requirements involved in operating the plan.

For most companies, though, plan compliance doesn’t need to be a barrier to offering a 401(k) plan to employees. Thanks to advances in technology, many 401(k) service providers are well-equipped to run the plan while you tend to your business’s needs. It’s important to remember that even if you hire a third-party administrator (TPA), you are still responsible for making sure the plan is compliant.

To help demystify the process of establishing and maintaining a 401(k) plan, we provide an overview of the steps to ensure your plan is working within the rules set by the federal government.

Establishing a Plan
Whether you hire an outside administrator or establish a 401(k) in-house, there are four basic items that need to be addressed at the start:

Plan document: This is the 401(k) roadmap. It describes the type of plan you have established and includes details about investment, participation and vesting guidelines. The plan document also designates fiduciaries and administrators and identifies the roles they play. Participants receive an abbreviated version, which is called the Summary Plan Description.

Trust: As a fiduciary and plan sponsor, you must act in the best interest of the plan participants. This includes setting up a trust to make sure the plan assets are held in an account that is used solely for 401(k) participants and not mixed with other company funds.

Recordkeeping system: Sponsors need an accurate way to track the inflows and outflows of the plan’s assets. The recordkeeper is a key resource in tracking this information as well as helping prepare the annual report and other federally required documents.

Employee statements and notices: In addition to the Summary Plan Description, other communications participants must receive account statements; disclosure statements for plan features, blackout periods, fees, expenses, investment options and performance; and the Summary Annual Report, which is a digest of the information found in Form 5500.

Operating a Plan
Once a plan has been established, there are certain responsibilities that all sponsors face while the plan is being operated. Here are some of the most important elements plan sponsors need to maintain or monitor to ensure that the plan is compliant with federal law.

Plan contribution and compensation limits: The Internal Revenue Service (IRS) sets these limits annually. Eligible participants can contribute up to $18,500 in 2018, and participants 50 and older can make an extra $6,000 in catch-up contributions. The total amount a participant can receive on all contributions is the lesser of 100 percent of the employee’s pay or $55,000. For certain employees with compensation over an annual threshold, currently $275000, there are caps on funding limits imposed by the IRS.

Required Minimum Distributions (RMDs): Participants who are age 70.5 or older and are not working for the company must start receiving an annual benefit distribution from the plan. More than 5% owners and certain relatives must take an RMD regardless of employment status.

Other distribution rules: For traditional 401(k) plans, money is deposited pre-tax, accumulates tax free, and gets taxed when withdrawn; there may be other tax implications for early withdrawals before age 59.5. Contributions to Roth 401(k) plans are made using after-tax income, and distributions, including growth, are tax-free.

Form 5500: This publicly available form goes to the IRS and Department of Labor each year and provides information about the plan and how it operates.

Testing: Plans must undergo non-discrimination testing every year to make sure they benefit all employees equally, and not a specific group (such as highly compensated employees) more than another.

Deadlines: Like the Form 5500, there are certain reporting deadlines to deliver plan information to various federal agencies. In addition, employer contributions must be completed by a certain date to be considered tax deductible. The safe harbor for small plans is 5-7 days but there is no safe harbor for most large plans. These rules are relatively subjective based on facts and circumstances.

BDO Insight: Know Your Fiduciary Responsibilities
There are many benefits of offering a 401(k) plan. Studies have shown that companies that offer plans typically see higher levels of loyalty and productivity and lower levels of stress among employees. In addition, contributions provide tax deductions for the employer. Smaller companies can see additional tax credits in the first three years when offering a 401(k) plan.

Yet, these benefits come with many deadlines, formulas and procedures that need to be followed. So, it’s important to do your homework and be aware of 401(k) reporting and disclosure requirements. A trusted plan professional can help oversee the process, but working with a provider doesn’t relieve you of your fiduciary duty to run the plan in the best interest of its participants. Your BDO representative can help you through this process and explain the federal requirements in running a 401(k) plan.

]]>Tue, 14 Aug 2018 04:00:00 GMT28db82df-c007-4fc5-ba0d-5a3c1dbc4356
The program, called the Employee Plans Compliance Resolution System (EPCRS), has a three-tiered approach to resolving issues in all types of plans. As you might guess, the more complicated the issue, the more the IRS gets involved. Here, we’ll explain some of the common failures and the remedies available to plan sponsors.

Types of Errors
The types of errors that plan sponsors make and that may need corrections generally fall into four main categories:

Operational issues: plan sponsor does not follow provisions in the plan

Plan document failure: plan document is written in a way that violates tax-qualification requirements

Demographic complications: plan operates in a way that fails non-discrimination, participation or other coverage issues that undo tax qualification requirements

Three Levels of Corrective Measures
The IRS provides three options for fixing issues. The first is a do-it-yourself, voluntary program called the Self-Correction Program (SCP). This allows the plan sponsor to fix the issue without informing the IRS or paying a fee. To qualify, plan sponsors must have more than a plan document; they must have established practices and procedures. Also, this remedy is only for operational failures. For example, complications with vesting, eligibility, auto-enrollment are all common operational problems that qualify for SCP. Additionally, the self-correction program must be corrected within the time frame noted for significant errors. Insignificant errors can occur at any time.

Plan sponsors interested in using SCP should follow Revenue Procedure 2016-51, Section 6. It’s important to note that plans have until the end of the second plan year after the problem occurred to complete the correction.

The second remedy is called the Voluntary Correction Program (VCP) and is available for all types of errors. This is a more involved program that is used when multiple corrections are needed or when a plan sponsor isn’t sure how to proceed. Plan sponsors must notify the IRS of mistakes as well as show how issues will be corrected. After receiving the plan sponsor’s submission, the IRS will issue a letter called a Compliance Statement that will recap the failures and the IRS-approved corrective measures. The plan sponsor has 150 days from receiving the Compliance Statement to fix the problems.

The benefit of the VCP is that it provides certainty: the IRS designates what to do, and the plan should be operating to IRS standards if the remedies are followed correctly. One drawback, however, is that VCP requires a fee. The cost used to be based on the number of participants, but now it’s based on plan assets. The table can be found here.

Plan sponsors interested in using VCP should start by filling out form 8950 and 8951. In addition, there may be other forms required, so it’s important to follow the directions in Revenue Procedure 2016-51, Part V.

The last program is called the Audit Closing Agreement Program (Audit CAP). This is available when a plan is under audit and has multiple issues or any error that the IRS requires correction of. The IRS starts with a sanction or closing fee to determine the penalties for the violations. The regional agent will review the facts and circumstances to determine the fee, but a bit of subjectivity is in play, too. In many cases, plan sponsors may choose to work with a service provider to negotiate the maximum payment amount. The IRS notes that the fee will be higher than what plan sponsors would pay under VCP and will reflect the severity of the issues in the plan.

If the plan sponsor and the IRS cannot come to an agreement on the correction or the fine, the plan will be disqualified. Plan sponsors who are required to comply with an Audit CAP should review Revenue Procedure 2016-51, Section 14, for more details.

BDO Insight: Be Proactive and Document Your Actions
Operating a retirement plan is not always easy, and it’s inevitable that plan sponsors will run into issues on occasion. The key is to address problems as quickly and efficiently as possible, so errors do not trigger an IRS audit.

While the IRS gives solid information, plan sponsors may not find everything needed to do the self-correction. In this case, plan sponsors may need to ask the IRS for a self-determination letter. Also, there are other issues—such as fiduciary violations or missed Form 5500 filings—that the EPCRS cannot fix.

Even when using the SCP, plan sponsors should document every step made to correct all failures. This records the plan sponsor’s process as well as helps establish procedures going forward. In all the EPCRS programs, the objective is to restore the plan to where it would have been had the errors not happened. Your BDO representative is available to help walk you through the EPCRS process.

Summary

The FASB issued ASU 2018-10[1] which affects narrow aspects of the guidance in ASU 2016-02, Leases (Topic 842). The amendments included in this ASU clarify the intended application of certain aspects of the new leases guidance and correct cross-reference inconsistencies. The new ASU is available here, and has effective dates and transition provisions that align with an entity’s adoption of ASU 2016-02, except for entities that early adopted Topic 842, for which the amendments in this ASU are effective upon issuance.

Background

In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. ASU 2018-10 includes sixteen narrow amendments to the leases standard resulting from implementation activities such as discussions between the FASB and stakeholders, technical inquiries, and routine Codification feedback.

Main Provisions

The amendments in ASU 2018-10 are similar in nature to those in the FASB’s ongoing project to make improvements to clarify the Codification or correct unintended application of the guidance. However, the FASB decided to issue a separate ASU for improvements related to the new leases guidance to increase stakeholders’ awareness and expedite the improvements.

Key Amendments

Rate Implicit in the Lease
An amendment was made to the Master Glossary term Rate Implicit in the Lease to clarify that the rate implicit in the lease cannot be less than zero. In other words, if the implicit rate is determined to be less than zero when applying the Master Glossary definition, a rate of zero should be used.

BDO Observation

Some stakeholders questioned whether a negative rate implicit in the lease could be used for sales-type leases with significant variable payments in lieu of recognizing a loss at the commencement date of the lease (a Day-1 loss). The Board however clarified that a Day-1 loss is the intended outcome.

This is consistent with the decisions the Board previously made about the treatment of variable lease payments under Topic 842, other than those based on an index or a rate (i.e., the decision not to require entities to estimate future variable lease payments as that would be too costly and complex based on stakeholder feedback during the leases project).

The following summarizes the determination of the rate implicit in the lease under the ASU:

(FV) Fair value of underlying asset minus related investment tax credit retained/expected to be realized by the lessor
(IDC) Any deferred initial direct costs of the lessor
(LPs) Lease payments
(RV) The amount that a lessor expects to derive from the underlying asset following the end of the lease term

​Impairment of Net Investment in the Lease
The amendments in the ASU clarify the application of the impairment guidance for lessors when determining the loss allowance of a net investment in a lease, including the cash flows to consider in that assessment.

BDO Observation

Some stakeholders had questioned whether the impairment guidance, prior to the amendments in this ASU, would have resulted in an accelerated and improperly measured loss allowance on a net investment in a lease because the cash flows associated with the unguaranteed residual asset appeared to be excluded from the assessment. The Board therefore decided to make amendments to the impairment guidance to clarify the cash flows to consider, and those include the cash flows associated with the unguaranteed residual asset. This is consistent with the inputs a lessor uses for the initial accounting of the net investment in a lease (which includes the expected value that the lessor expects to derive from the underlying asset following the end of the lease term).

Certain Transition Adjustments
Amendments were made to both the lessee and the lessor transition guidance to clarify whether to recognize certain transition adjustments to earnings rather than through equity when an entity applies Topic 842 retrospectively to each prior reporting period and the entity does not elect the package of practical expedients in paragraph 842-10-65-1(f).[2]

Transition Guidance for Amounts Previously Recognized in Business Combinations
The amendments clarify when transition paragraph 842-10-65-1(h)(3), which relates to assets or liabilities recognized for favorable or unfavorable terms of an operating lease acquired as part of a business combination, applies for lessors. Specifically, the transition paragraph applies when an entity does not elect the package of practical expedients and, for a lessor, an operating lease acquired as part of a business combination is classified as a sales-type lease or direct financing lease under Topic 842.

BDO Observation

The amendments to the transition guidance bring important clarifications about whether certain transition adjustments should be recorded in earnings rather than through equity when an entity applies Topic 842 retrospectively to each prior reporting period and the entity does not elect the package of practical expedients. The amendments to the transition guidance focus primarily on unamortized initial direct costs that no longer meet the definition of initial direct costs under Topic 842 and on transition adjustments for situations in which the classification of a lease changes. Prior to those amendments, the transition provisions required such adjustments to be recorded through equity only.

The transition amendments in this ASU are further amended by ASU 2018-11 Leases (Topic 842): Targeted Improvements.[3] Specifically, ASU 2018-11 provides entities with an additional (and optional) transition method to adopt the new leases guidance. This transition method allows entities to initially apply the new leases guidance by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, rather than at the beginning of the earliest period presented. An entity that adopts Topic 842 using the new transition method described in ASU 2018-11 will not be affected by the amendments made in ASU 2018-10 since the transition adjustments will be recorded in equity.

Other Codification Improvements Made

Topic within ASC 842

Description

Transition Guidance for Leases Previously Classified as Capital Leases under Topic 840 and Classified as Finance Leases Under Topic 842

An amendment was made to correct a reference in the subsequent measurement guidance before the effective date when an entity applies Topic 842 retrospectively to each prior reporting period (i.e., the existing transition method prior to ASU 2018-11).

Transition Guidance for Modifications to Leases Previously Classified as Direct Financing or Sales-Type Leases under Topic 840 and Classified as Direct Financing or Sales-Type Leases under Topic 842

An amendment was made to correct an inconsistency noted in the transition guidance for lease modifications. The amended guidance in paragraph 842-10-65-1(x)(4) now refers to how the lease is classified before a modification to be consistent with the guidance in paragraphs 842-10-25-16 through 25-17.

Transition Guidance for Sale and Leaseback Transactions

Amendments were made to clarify that the transition guidance on sale and leaseback transactions applies to all sale and leaseback transactions that occur before Topic 842’s effective date and also to correct some referencing issues.

Lessor Reassessment of Lease Term and Purchase Option

The amendment clarifies that the exercise by a lessee of an option to extend or terminate the lease or to purchase the underlying asset should not be accounted for as a lease modification when the exercise of the option by the lessee is consistent with the assumptions that the lessor made in accounting for the lease at the commencement date of the lease (or at the most recent effective date of a modification not accounted for as a separate contract).

Unguaranteed Residual Asset

The words “substantially all” were added to paragraph 842-30-35-4 to clarify the guidance on the sale of the lease receivable. Specifically, the amendment clarifies that a lessor should stop accreting the unguaranteed residual asset to its estimated value over the remaining lease term if the lessor sells substantially all of the lease receivable associated with a direct financing lease or a sales-type lease, which is consistent with current guidance under Topic 840.

Effect of Initial Direct Costs on Rate Implicit in the Lease

The ordering of content in the illustration on Lessor Accounting – Direct Financing Lease (Case C of Example 1 in paragraphs 842-30-55-31 through 55-39) was amended to more closely align that illustration with the guidance in paragraph 842-10-25-4.

Lessee Reassessment of Lease Classification

The amendments clarify how a lessee should reassess lease classification when there is a change in the lease term or the assessment of a purchase option. Such reassessment should be based on the facts and circumstances as of the date the reassessment is required (i.e., based on the fair value and remaining economic life of the underlying asset at the reassessment date). This is consistent with how an entity (lessee or lessor) should reassess lease classification for a lease modification that is not accounted for as a separate contact.

Variable Lease Payments That Depend on an Index or a Rate

Amendments were made to clarify that a change in a reference index or a rate upon which some or all of the variable lease payments are based does not constitute the resolution of a contingency requiring remeasurement of the lease payments. Rather, variable lease payments based on an index or a rate are remeasured only when the lease payments are remeasured for another reason.

Lease Term and Purchase Option

The amendment corrects an inconsistency in the implementation guidance about how to consider lessor-only termination options in relation to the noncancelable period of the lease.

Failed Sale and Leaseback Transaction

An amendment was made to clarify that a seller-lessee in a failed sale and leaseback transaction should adjust the interest rate on the resulting financial liability as necessary to ensure that the interest on the liability does not exceed the total payments (rather than the principal payments) to avoid negative amortization of the financial liability.

Residual Value Guarantees

The cross-reference in paragraph 460-10-60-32 was corrected to refer to the appropriate guidance in paragraphs 842-40-55-20 through 55-21 about guarantees by a seller-lessee of the underlying asset’s residual value in a sale and leaseback transaction.

Investment Tax Credits

An inconsistency in terminology about the effect of investment tax credits on the fair value of the underlying asset between the definition of rate implicit in the lease and the lease classification guidance in paragraph 842-10-55-8 was corrected.

Effective Date and Transition

For entities that early adopted Topic 842, the amendments are effective upon issuance of the ASU, and the transition requirements are the same as those in Topic 842.

For entities that have not adopted Topic 842, the effective date and transition requirements are the same as the effective date and transition requirements in Topic 842.
For questions related to matters discussed above, please contact:

[2] An entity may elect the following practical expedients, which must be elected as a package: 1. An entity need not reassess whether any expired or existing contracts are or contain leases; 2. An entity need not reassess the lease classification for any expired or existing leases; 3. An entity need not reassess initial direct costs for any existing leases.

Summary

The FASB issued ASU 2018-11[1] to reduce costs for entities in adopting the new leases standard and to ease the application of the separation and allocation guidance for lessors. The new ASU is available here, and has effective dates and transition aligning with an entity’s adoption of ASU 2016-02[2], except for entities that early adopted Topic 842, for which specific effective date and transition requirements apply.

Background

In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The new ASU includes a new (and optional) transition method whereby an entity can initially apply Topic 842 at its adoption date (for example January 1, 2019 for a calendar year-end public company) rather than at the beginning of the earliest period presented (for example January 1, 2017 for a calendar year-end public company). It also gives lessors a choice to not separate nonlease components from the associated lease component if certain conditions are met.

Main Provisions

Transition Relief
ASU 2016-02 initially provided a single transition method with which to adopt the new leases guidance: the modified retrospective transition method. Under that transition method, entities apply Topic 842 retrospectively to each prior reporting period presented including the new and enhanced Topic 842 disclosure requirements. Applying the new standard to prior periods can be an arduous and time-consuming task, and one which includes incremental efforts, such as calculating the balance sheet impact related to operating leases that were effective during those periods but which expired prior to the effective date of the new standard. As such, stakeholders questioned the benefits of this transition method compared to the costs to comply with it.

The FASB agreed with stakeholder feedback and decided to provide a new (and optional) transition method. Under the new transition method in ASU 2018-11, entities can initially apply the new leases guidance at the adoption date (rather than at the beginning of the earliest period presented) and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption (for example, January 1, 2019 for a calendar year-end public company), while continuing to present the comparative periods under Topic 840 (the legacy leases guidance). If an entity elects the new transition method, it is required to provide the Topic 840 disclosures for all prior periods that remain under the legacy leases guidance.

This additional transition method changes only when an entity initially applies the transition requirements of Topic 842, it does not change how to apply those requirements.

BDO Observation

We believe many entities will take advantage of this new transition method considering the cost savings it offers. However, even with this relief, entities should not delay their implementation projects, given the amount of effort still required.

This new standard is the third ASU to amend the transition provisions in Topic 842. Since neither of the first two ASUs[3] summarizes all of the transition-related provisions and changes thereof, entities may find it helpful to review the aggregate effect of the amendments in this latest ASU (ASU 2018-11), since it incorporates them all.

Separating Components of a Contract by Lessors
The new leases standard generally requires entities to separate the lease and nonlease components of a contract and account for each component under the relevant accounting guidance. Lessees were given a practical expedient whereby they could make an accounting policy election, by asset class, to not separate the components and to simply account for them as a single lease component. Prior to this ASU, lessors were not provided such an option.

The amendments in this ASU provide lessors with a practical expedient by asset class similar to the option lessees have; however, limitations apply for lessors. In order for a lessor to qualify for the practical expedient and account for the nonlease components and associated lease component as a combined (i.e., single) component, the nonlease components must first be in the scope of the new revenue guidance (i.e., Topic 606) and both of the following conditions must be met:

The timing and pattern of transfer of the nonlease component(s) and associated lease component are the same.

The lease component, if accounted for separately, would be classified as an operating lease.

When the above conditions are met, the entity will need to assess predominance. If the nonlease components are predominant, the entity accounts for the combined component under Topic 606; otherwise, the entity accounts for the combined component under Topic 842. In addition, a lessor that elects the practical expedient must combine all nonlease components that qualify for the practical expedient with the associated lease component. A lessor should continue to separately account for nonlease components that do not qualify for the practical expedient.

The following table summarizes the accounting based on the predominant component:

Nonlease Component(s) Predominant

Lease Component Predominant

Account for the combined component as a single performance obligation under Topic 606.

Account for single performance obligation using over time, time-based measure of progress.

Apply the variable consideration guidance under Topic 606, including the constraint, for all variable payments (including those that previously related to the lease component because it now is part of a single revenue component).

Account for the combined component as a single lease component under Topic 842.

Account for the combined component as an operating lease (i.e., the lessor should not perform a lease classification test),

Account for all variable payments related to any good or service that is part of the combined component as variable lease payments (i.e., do not estimate variable payments; rather recognize those payments in accordance with ASC 842-10-15-40).

Further, the following additional disclosures should be provided when a lessor elects the practical expedient (including when the combined component is accounted for under Topic 606):

The fact that the entity elected the expedient,

Which asset classes are affected,

The nature of (a) the lease component and nonlease component(s) that were combined as a result of applying the practical expedient and (b) any nonlease components that were not eligible for the practical expedient and, thus, not combined,

The Topic the entity applies to the combined component (i.e., Topic 606 or Topic 842).

BDO Observation

We believe many entities (including real estate entities and cable companies) will welcome this lessor practical expedient as it generally will enable them to account for their transactions under the new lease or revenue standards in a manner similar to how they have accounted for them in the past.

The following considerations are important in understanding (and evaluating whether a lessor qualifies for) the practical expedient:

The practical expedient applies only to nonlease components that otherwise would be accounted for under Topic 606. It does not apply, for example, to a contract that includes a lease component and a loan component accounted for under Topic 310 on receivables.

Because of the condition that the lease component be classified as an operating lease if separated, this means that the timing and pattern of transfer of the nonlease components also must be straight-line (i.e., over time, time-based) to qualify for the practical expedient.

Determining whether the lease component would be classified as an operating lease if accounted for separately generally should not require a detailed quantitative analysis and may often be determined using a reasonable qualitative assessment.

A lessor should be able to reasonably determine which component is predominant (i.e., a lessor does not have to perform a detailed quantitative analysis or theoretical allocation). We believe entities may use a >50% threshold in determining which component is predominant for this lessor practical expedient, even though this may not necessarily align with how the concept of predominance is described under Topic 606.[4]

When a contract includes a lease component and multiple nonlease components, the fact that some nonlease components do not meet the conditions for combining (e.g., a nonlease component that transfers at a point-in-time) does not preclude the lessor from qualifying for the practical expedient. However, in those situations the lessor must combine all nonlease components that qualify with the associated lease component, and account for those as a single component. The nonlease components that do not qualify should be accounted for separately. Accordingly, the lessor is required to separate and allocate the consideration in the contract between the combined component on one hand and the nonlease components that do not qualify on the other hand.

Effective Date and Transition for Lessor Practical Expedient

The amendments in this ASU related to the lessor practical expedient affect the amendments in ASU 2016-02, which are not yet effective but can be early adopted.

For entities that have not adopted ASU 2016-02 before the issuance of this ASU, the effective date and transition requirements for the amendments in this ASU for the practical expedient are the same as the effective date and transition requirements in ASU 2016-02.

For entities that have adopted ASU 2016-02 before the issuance of this ASU, the transition and effective date of the amendments in this ASU for the practical expedient are as follows:

The practical expedient may be elected either in the first reporting period following the issuance of this ASU or at the original effective date of Topic 842 for that entity. For example, a calendar year-end public company that early adopted Topic 842 may elect the practical expedient either during Q4, 2018 (the first reporting period following the issuance of the ASU) or on January 1, 2019 (its original effective date if it had not early adopted).

The practical expedient may be applied either retrospectively or prospectively.

All entities, including early adopters, that elect the lessor practical expedient must apply the expedient by asset class to all existing lease transactions that qualify for the expedient at the date elected.

BDO Observation

It is important for entities to note that the decision to elect (or not elect) the lessor practical expedient should be made for existing asset classes at the adoption date of the amendments in this ASU. If elected, the transition provisions in the ASU require a lessor to apply the practical expedient to all new and existing lease transactions within that asset class.

For example, a calendar year-end public company that adopts the new leases standard (and the amendments in this ASU) on January 1, 2019 would first need to determine at that date the existing asset classes for which it wishes to elect the practical expedient. Then, for the selected asset classes, the entity would apply the lessor practical expedient to all of the existing leases that are actually eligible for the expedient.

[4] Topic 606 uses the concept of predominance when discussing the sales-based and usage-based royalty exception for licenses of intellectual property. That guidance notes that “... the license of intellectual property may be the predominant item to which the royalty relates when the entity has a reasonable expectation that the customer would ascribe significantly more value to the license than to the other goods or services to which the royalty relates [emphasis added]”.

A NOTE FROM BDO’S NATIONAL ERISA PRACTICE LEADER

A central mission of BDO’s ERISA Center of Excellence is sharing knowledge and best practices with the industry. We believe in the power of education to fuel growth and people development.

This quarter, many of our publications centered on this mission – to inform not only on current events, but to inspire plan sponsors to take a deeper look and identify creative solutions for the welfare of their employees.

We saw a number of newsworthy topics last quarter – GDPR went into effect; the DOL made announcements around their fiduciary rule enforcement policy; and Congress took a hard look at ESOPs. Changes to the employee benefit plan landscape make it challenging for you to stay ahead of regulations and requirements. Our ERISA practice is proud to play a role in that effort.

Sincerely,

BETH GARNER
National Practice Leader, ERISA

IN THIS ISSUE...

Loans and Hardship Withdrawals: New Rules for Employees Dealing With Natural Disasters and Other Financial Emergencies

Natural disasters including Hurricanes Harvey, Irma and Maria, as well as the California wildfires, caused a record-breaking $283 billion in damage to homes and other property in 2017, according to the National Oceanic and Atmospheric Administration.

DOL Announces Temporary Fiduciary Rule Enforcement Policy

The Department of Labor (DOL) announced a temporary enforcement policy on May 7th explaining that it would not pursue legal action against investment advice professionals who rely on the Obama Administration’s definition of fiduciary.

Financial Well-Being for Women: Empowering Employees by Helping Them Prepare for Retirement

The growth of women’s influence in U.S. workplaces has been remarkable over the last several decades. Female labor force participation rates have increased from 43% in 1970 to 57% in 2018, according to the Federal Reserve Bank of St. Louis. As of 2016, women held 52% of all management, professional and related positions, according to the Bureau of Labor Statistics. But there are still many areas where a significant gap remains between men and women employees, including when it comes to preparing for retirement.

Employee Stock Ownership Plans Gain Attention in Congress

Congress is paying more attention to Employee Stock Ownership Plans (ESOPs) this session, with two New York legislators shepherding through bills aimed at promoting this type of defined contribution plan.

Last year’s tax reform law has created a rare opportunity for defined benefit plan sponsors to take advantage of the tax rate difference by accelerating deductions to the year with the higher tax rate. The lowering of the corporate tax rate makes pension plan contributions for the 2017 plan year significantly cheaper on an after-tax basis than contributions for the 2018 plan year.

GDPR: What Plan Sponsors Need to Know About the EU’s New Data Protection Rules

The European Union’s (EU) General Data Protection Regulation (GDPR) went into effect May 25, and its impact reaches across the pond to many U.S.-based businesses that collect, use or store data from EU residents.

Auto-Enrollment and Auto-Escalation: Right for Your Retirement Plan?

When it comes to saving for retirement, getting started can be the hardest part for many employees. This challenge, however, is being solved for many American workers by the dramatic increase over the past decade in the percentage of 401(k) plans that use automatic enrollment and automatic escalation features to encourage participation.

Competition for talent is fierce today, and many employers are searching for solid benefit strategies to attract and retain top employees. One approach that can accomplish these goals is the cash balance plan. These plans have been growing in popularity in recent years despite the fact that many in the benefits industry once considered cash balance plans to be nearly extinct.

Financial Well-Being for Men: Helping Them Prepare for a Successful Retirement

Many sitcoms and comedians have played with the stereotype that male drivers are notoriously reluctant to stop and ask for directions. According to research, this reluctance to ask for help also affects men as they head toward retirement—and what that means for employees’ financial well-being isn’t anything to joke about.

UPCOMING EVENTS AND HAPPENINGS

SHRM Conference 2018
Members of BDO’s ERISA team recently returned from the annual Society for Human Resource Management (SHRM) Conference & Exposition in Chicago where we helped attendees power up with BDO charging stations during breaks. BDO is proud to be a sponsor of this fantastic event geared to strengthen and develop HR practices.

We learned so much attending sessions and met a lot of great HR folks. If we missed you this time around, we hope to see you next year!

Upcoming Filing Deadline
The first filing deadline for the Form 5500 is Tuesday, July 31. Extensions should be filed if the filing deadline cannot be met.

Important Deadlines to Establish a Qualified Plan: Qualified plans must be implemented by December 31, 2018 in order to take advantage of the tax return deductions available for employers and participants. The time to start planning is now in order to have sufficient time before year end. It’s too late to start a qualified plan for 2017, but employers may consider funding a SEP, Simplified Employee Pension Plan, for the 2017 year which must be implemented by the due date of the corporate return including extensions. Note Safe harbor 401(k) plans for new businesses must be in place for at least 3 months of the year.CONTACT:

Summary

The FASB issued ASU 2018-07[1] to expand the scope of Topic 718[2] to include share-based payments issued to nonemployees. The new ASU is available here, and the effective date for public companies is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the effective date is fiscal years beginning after December 15, 2019. Early adoption is permitted.

Background

On June 20, 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, as part of its ongoing Simplification Initiative. Currently, share-based payments to nonemployees are accounted for under Subtopic 505-50[3] which significantly differs from the guidance for share-based payments to employees under Topic 718. This ASU supersedes Subtopic 505-50 by expanding the scope of Topic 718 to include nonemployee awards and generally aligning the accounting for nonemployee awards with the accounting for employee awards (with limited exceptions).

Main Provisions

The amendments specify that Topic 718 applies to all share-based payment transactions where the grantor is acquiring goods or services being used or consumed in its own operations by issuing these awards. They do not apply to share-based payments that are used to effectively provide financing for the grantor/issuer or that are granted in conjunction with selling goods or services to customers as part of a contract which should be accounted for under Topic 606.

Key Amendments Applicable to All Entities

Equity-classified nonemployee share-based payment awards are no longer measured at the earlier of the date at which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. Rather, they are now measured at the grant date.

Nonemployee share-based payment awards with performance conditions are measured at the lowest aggregate fair value under today’s guidance, which often results in zero value. The new ASU aligns the accounting for nonemployee share-based payment awards with performance conditions with accounting for employee share-based payment awards under Topic 718 by requiring entities to consider the probability of satisfying performance conditions.

Subtopic 505-50 requires equity-classified nonemployee share-based payment awards to follow other guidance (e.g. Topic 815[4]) upon vesting, which then requires entities to reassess classification of the awards under that other guidance at that time. This ASU eliminates the reassessment of classification upon vesting and instead, requires the nonemployee share-based payment awards to continue to be subject to Topic 718 unless they are modified after the good has been delivered, the service has been rendered, or any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services, consistent with the treatment of employee awards.

Current guidance requires entities to use the contractual term for measurement of the nonemployee share-based payment awards. The new ASU allows entities to make an award-by-award election to use either the expected term (consistent with employee share-based payment awards) or the contractual term for nonemployee awards.

BDO Observation:

Entities should note the ASU does not change the period of time over which nonemployee awards vest or their pattern of recognition in the financial statements. The Board decided to maintain current practice on this point, which generally requires nonemployee awards to be recognized in the same period and in the same manner (i.e., capitalize or expense) that a cash-based payment would be. Therefore, the timing of recognition for nonemployee awards could continue to differ from the timing of recognition for employee awards which are recognized ratably over the service period.

Amendments Applicable to Nonpublic Entities

Intrinsic Value
Entities are required to measure liability-classified nonemployee share-based payment awards at fair value under current guidance. The new ASU now permits nonpublic entities to elect a policy to measure all liability-classified share-based payments to nonemployees at intrinsic value instead of fair value. However, this accounting policy must be elected for awards to both nonemployees and employees. For example, if an entity already has made a policy election for its employee awards, it should also apply the policy election to nonemployee awards. The nonpublic entity is not required to evaluate whether the change in accounting policy is preferable under Topic 250.

Calculated Value
When a nonpublic entity is not able to reasonably estimate the fair value of nonemployee awards because it is not practicable to estimate the expected volatility of its share price, the entity may account for the awards using the calculated value method under Topic 718. The nonpublic entity may account for the awards on the basis of a value calculated using the historical volatility of an appropriate industry sector index. This calculated value should be consistent between employee share-based payment transactions and nonemployee share-based payment transactions.

Effective Date and Transition

The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.[5] If an entity elects to early adopt the ASU in an interim period, the adoption must be reflected as of the beginning of the relevant fiscal year.

Upon adoption, an entity should remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established at fair value as of the adoption date. The impact of remeasurement must be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

If the cost associated with nonemployee awards was capitalized as part of an asset, the entity must not remeasure assets that are completed. For example, finished goods inventory or equipment that has begun amortization should not be remeasured upon transition.

Disclosures required at transition include the nature of and reason for the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other components of equity.

]]>Thu, 26 Jul 2018 04:00:00 GMTd7cb050b-e264-4e4d-9d10-e4ce1c32644bSummary
The FASB issued ASU 2018-081 to clarify the accounting guidance related to contributions made or received. This guidance primarily affects not-for-profit (NFP) entities, although it also applies to businesses to the extent that they make or receive contributions, including grants. The ASU will likely result in more grants and contracts being accounted for as unconditional or conditional contributions rather than exchange transactions compared to current guidance. The new ASU is available here, and has various effective dates beginning after June 15, 2018 with specific transition guidance. Early adoption is permitted.

Background

The implementation of ASC Topic 6062 brought to light diversity in practice in how NFP organizations classify grants and contracts in the financial statements from federal, state and local governments and other funding sources such as foundations as either contributions (nonreciprocal) or exchange (reciprocal) transactions. Contributions, defined as an unconditional transfer of cash or assets in a voluntary non-reciprocal transfer, are scoped out of Topic 606 whereas exchange transactions, a reciprocal transaction in which two parties exchange items of commensurate value, are within the scope of Topic 606 and must be accounted for following the new revenue recognition guidance.

Diversity also exists in assessments of restrictive conditions specified in the contribution arrangement, including whether the likelihood of failing to meet a condition is remote and whether and how remote provisions affect the timing of when a contribution is recognized. Differences in these conclusions can affect the timing of revenue recognition.

The FASB issued ASU 2018-08 to reduce this diversity by clarifying (1) whether transactions should be accounted for as contributions within the scope of Topic 9583 or as exchange transactions subject to other guidance and (2) whether a contribution is conditional.

Main Provisions

Characterizing Grants and Similar Contracts as Reciprocal Exchanges or Contributions
The ASU clarifies and improves the scope and accounting guidance for both contributions received and made in order to assist entities in evaluating if those transactions should be accounted for as contributions under the scope of Topic 958, or as an exchange transaction subject to other guidance. For purposes of assessing potential contributions, examples of the transactions in question include contributions of cash and other assets, including promises to give, or reductions, settlements, or cancellation of liabilities. Examples of resource providers include a government agency, a foundation, a corporation, or other entity. However, the type of resource provider is not determinative of whether a transaction is reciprocal or nonreciprocal.

The amendments clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider receives comparable value in return for the assets transferred, based on consideration of the following:

The resource provider is not one and the same with the general public. That is, a benefit received by the public as a result of the assets transferred is not equivalent to comparable value received by the resource provider. Therefore, if the resource provider receives indirect value in exchange for the assets transferred or if the value received by the resource provider is incidental to the potential public benefit from using the assets transferred, the provider isn’t considered to have received comparable value in return.

Execution of the resource provider’s mission or the positive sentiment from acting as a donor doesn’t constitute comparable value received by the resource provider for purposes of determining whether the transfer of assets is a contribution or an exchange.

Paragraph 958-605-15-5A provides additional indicators:

Exchange Transaction Indicator

Contribution Indicator

Expressed intent asserted by both the recipient and the resource provider is to exchange resources for goods or services that are of comparable value.

The recipient solicits assets from the resource provider without the intent of exchanging goods or services of comparable value.

Both the recipient and the resource provider agree on the amount of assets transferred in exchange for goods and services that are of commensurate value.

The resource provider has full discretion in determining the amount of the transferred assets.

The existence of contractual provisions for economic forfeiture beyond the amount of assets transferred by the resource provider to penalize the recipient for nonperformance.

The penalties assessed on the recipient for failure to comply with the terms of the agreement are limited to the delivery of assets or services already provided and the return of the unspent amount.

In instances in which a resource provider itself is not receiving comparable value for the resources provided, an entity must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, Topic 606) applies.

Determining Whether a Contribution is Conditional
The amendments require an entity to determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisors’ obligation to transfer assets. If the agreement (or referenced document) includes both, the recipient is not entitled to the transferred assets (or future transfer of assets) until it has overcome the barriers in the agreement.

Paragraph 958-605-25-5D provides a list of indicators to consider in determining whether an agreement contains a barrier. The indicators include:

The inclusion of a measurable performance-related barrier or other measurable barrier.

The extent to which a stipulation limits discretion by the recipient on the conduct of an activity.

Whether a stipulation is related to the purpose of the agreement.

After a contribution has been deemed unconditional, an entity should consider whether the contribution is restricted on the basis of the existing definition of the term donor-imposed restriction, which includes a consideration of how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date.

Simultaneous Release Option
The new ASU provides a not-for-profit entity with the ability to elect a policy to report donor-restricted contributions whose restrictions are met in the same reporting period as the revenue is recognized as support within net assets without donor restrictions so long as the entity has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its accounting policy. An entity electing this policy for donor-restricted contributions that were initially conditional contributions (where the condition has been met) may do so without also having to elect it for other donor-restricted contributions or investment gains and income provided that the entity reports consistently from period to period and discloses its accounting policy.

Implementation Guidance and Illustrations
The ASU includes implementation guidance and practical illustrations of the amendments. Refer to Appendix 1 for a diagram illustrating the framework for classifying transfers of assets.

Effective Date and Transition

Public entities should apply the amendments on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments on contributions received to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

Public entities4 should apply the amendments on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments on contributions made to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.

Early adoption of the amendments is permitted.

The guidance many be applied either through a modified prospective or a full retrospective approach.

Under the modified prospective approach, the amendments should be applied to agreements that are not completed as of the effective date and to all agreements entered into after the effective date. Additional clarifying transition guidance is provided for this approach.

Framework for Classifying Transfers of Assets
The following diagram excerpted from paragraph 958-605-55-1A illustrates the process for determining whether a transfer of assets to a recipient is a contribution, an exchange transaction, or another type of transaction and whether a contribution is conditional. The diagram also illustrates whether a contribution includes an associated donor restriction.

[1] Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

[2] Revenue from Contracts with Customers

[3] Not-for-Profit Entities

[4] Defined for purposes of this ASU as a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient.

]]>Thu, 26 Jul 2018 04:00:00 GMT42d0540e-faea-4d21-97cf-06ebdc0d5172A new publication issued by the Center for Audit Quality aims to assist users of financial statements in better understanding the identification and communication of critical audit matters (CAMs) within the new auditor’s report. Changes to the auditor’s report required by PCAOB AS 3101 were divided into two phases and CAMs are the second and more significant phase of implementation effective between June 30, 2019 and December 17, 2020. The inclusion of CAMs in the auditor’s report is intended to make the report more informative and relevant to its users by identifying and describing CAMs, while also detailing how the risk was addressed in the audit and direct financial statement users to relevant financial statement accounts or disclosures.

Overview

This summer, the Center for Audit Quality (CAQ) released a new publication,

Implementation

The effective dates for CAMs to be included in the auditor’s report are as follows:

For audits of large accelerated filers: fiscal years ending on or after June 30, 2019

For audits of all other companies to which the requirements apply:[1] fiscal years ending on or after December 15, 2020

Click the image to view larger version.

During this time, BDO is performing pilots to test our methodology for determining and reporting CAMs and will use such information to inform good practices in reporting for all public filers.

Critical Audit Matters

A CAM has a three part definition as follows:

Arises from the audit of the financial statements that was communicated or required to be communicated to the audit committee. This language aligns with communication requirements stating the auditor is to provide the audit committee timely observations arising from the audit that are significant to the financial reporting process. Simply stated, this is already being done in conversations between auditors and the audit committee.

Relates to accounts or disclosures that are material to the financial statements. This allows for the matter to be a component of an account, not necessary the entire account.

Involves especially challenging, subjective, or complex auditor judgment. The auditor may give consideration to materiality, assessment of risk, degree of auditor judgement, significant unusual transactions, degree of auditor subjectivity in applying transactions, degree of auditor subjectivity in applying procedures, nature and extent of audit effort including extent of specialized skill or knowledge, including consultations, and nature of audit evidence, among other considerations.

CAM Reporting
CAM reporting is intended to make the auditor’s report more informative and relevant to its users, but explicitly does not alter the opinion of the financial statements taken as a whole. The CAQ provides sample language to this effect to introduce the CAMs, and there is further PCAOB guidance on language if there are no CAMs to be reported.

There are four primary CAM reporting requirements:

Identify the CAM;

Describe the principal considerations that led the auditor to determine that the matter is a CAM;

Describe how the CAM was addressed in the audit; and

Refer to the relevant financial statement accounts or disclosures that relate to the CAM.

While the specifications to be communicated are precise, SEC Chairman Jay Clayton noted that CAM reporting should not result in boilerplate language that lacks meaningful information specific to the audit.

Consideration of Previous Reporting Standards in Other Jurisdictions
The International Auditing and Assurance Standards Board (IAASB), the European Union (EU), and the Financial Reporting Council (FRC) have all adopted requirements in their respective standards that expanded the auditor’s reports in their jurisdictions. Of particular interest is the IAASB’s 2016 year end implementation as the first year of implementation was analyzed by the Association of Chartered Certified Accountants who reported that the new standards did help provide better information to investors. The report further noted three additional benefits: better governance, better audit quality, and better corporate reporting.
The PCAOB standard is not identical, as each jurisdiction needs to consider the evolution of the disclosure, the jurisdiction’s capital markets and disclosure regimes, and each jurisdiction’s legal environment which creates differences in risk. The CAQ publication further compares the standards within its publication.

As noted above, BDO is performing pilots to test our methodology for determining and reporting CAMs. Additionally, the PCAOB and SEC have committed to performing post-implementation reviews of the new standard. These results will be compiled and analyzed and these activities are expected to result in further guidance and thought leadership throughout the implementation phases.

Following includes recently issued tools and resources audit committees and board members may find helpful:

We commend the CAQ for producing valuable tools and resources on this topic and others relevant to boards of directors. We will continue to highlight these and other activities, trends, and relevant discussions points to our client audit committees and management teams through our Center for Corporate Governance and Financial Reporting.
For questions related to matters discussed above, please contact:

[1] AS 3101 excludes the communication of CAMs for audits of brokers and dealers; investment companies other than business development companies; employee stock purchase, savings, and similar plans; and emerging growth companies.

]]>Thu, 26 Jul 2018 04:00:00 GMTf3010146-8ccb-4249-9f25-87cf9739e059

Put simply, at BDO, we believe that audit quality is the cornerstone of trust in financial reporting and financial markets. Without trust, capital markets cannot function efficiently and innovation cannot thrive. In this era of rapid change and disruption across industries, trust is more important than ever.

BDO is proud to stand together with the Center for Audit Quality and our highly respected peers as we reaffirm our promise to the auditing profession.

The Promise of Our Profession

Thousands of newly minted U.S. accounting graduates will become auditors this year. We welcome them to a profession full of promise.

A career in the auditing profession promises to be one of opportunity—the opportunity to learn and grow in a place where diversity, inclusiveness, respect, and doing right by others is not only embraced, but central to our long-term success. For these reasons, and many others outlined here, our firms are consistently named among the best places to work.

Graduates will join a profession that is purpose-driven. By helping to provide the capital markets with confidence and assurance in financial reporting, what we do matters to people far beyond our own. High-quality audits matter to workers, retirees, communities, investors, the capital markets, and the global economy. In the words of U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton: "The bedrock of our financial system is the audit."

Our profession is bolstered by robust accountability and oversight that we embrace for the trust and confidence it engenders. In the United States, the auditing profession benefits greatly from the presence of a strong, independent regulator—the Public Company Accounting Oversight Board (PCAOB)—which was founded in 2003 and which establishes and enforces high standards in coordination with the SEC.

Graduates joining audit firms this summer can take pride in being part of a profession that is built on trust and integrity. In the United States, this foundation is supported by an effective system of corporate governance, one that was reinforced by the same law that created the PCAOB: the Sarbanes-Oxley Act of 2002 (SOX). Among a range of provisions, the law made the independent audit committees—not management—responsible for hiring, compensating, and overseeing the external auditor. To further enhance auditor independence, the Sarbanes-Oxley Act established rules such as requiring lead engagement partner rotation every five years, as well as prohibiting a range of non-audit services to audit clients. SOX also requires the audit committee to pre-approve permissible non-audit services to audit clients; fees from these services to audit clients must be disclosed publicly.

Our profession also offers new generations the chance to work with the best and brightest in teams across disciplines in an era of unprecedented technological change. With the Sarbanes-Oxley safeguards in place, as auditors, we are increasingly tapping the expertise of colleagues in key areas, such as information systems, cybersecurity risk management, valuation, and complex tax matters. Such a multidisciplinary approach also helps firms to integrate cutting-edge technologies into the audit, a feature that is especially important at a time when artificial intelligence, advanced data analytics, and blockchain have the potential to revolutionize the audit.

Working with the PCAOB for 15 years now, each of our firms and others have made massive investments in systems of quality control, focusing on codes of conduct and partner assignment processes, technical accounting and auditing support specialists, and internal inspections. We have oriented partner compensation around rewarding quality, built accountability frameworks, and developed robust processes for analyzing quality drivers. Investors and others can read about these efforts in detailed quality reports that we each issue with pride annually.

For our new hires, this sustained dedication to quality with independent oversight puts the profession on a solid foundation. And it is one of many reasons surveys consistently show that U.S. investors have high degrees of confidence in U.S. capital markets, public companies, and audited financial information. Sarbanes-Oxley provisions requiring management and auditors to report on internal control over financial reporting have contributed to this confidence. Financial restatements have dropped off dramatically since 2005 and have trended down for five straight years.

Perhaps most important of all, the promise of our profession is a commitment to improve—continually. Indeed, for auditors, continual improvement is more than a commitment; it is an imperative. As observed recently by SEC Chief Accountant Wesley Bricker: "Trust in the audit is nurtured as the profession consistently delivers audit quality and value to audit committees and the investing public. Trust can be nurtured or broken—it is neither static nor assumed." We pledge to adapt to the ever-changing environment in which companies operate and report financial information. In the ongoing global dialogue around audit quality, we will remain open to constructive new ideas that are carefully informed, again in Bricker's words, by "an assessment of the costs, benefits, and consequences (both intended and not) to the right expectations of investors and others." Our commitment to continuous improvement benefits our workforce as much as it does the capital markets in that it instills values that are essential to success.

We, along with the class of 2018, will continue to build on the auditing bedrock that has supported our capital markets for decades.

]]>Tue, 24 Jul 2018 04:00:00 GMT79362d8e-c5c4-488d-9196-da005a905223
Plaintiff’s class action lawsuits against excessive fees dominated Employee Retirement Income Security Act (ERISA) litigation in 2017, according to Seyfarth Shaw’s annual Workplace Class Action Litigation Report. Of the $2.72 billion spent by employers on the top 10 aggregate workplace class action settlements, nearly $928 million came from the 10 largest ERISA settlements. That is up from $807 million in 2016.

Seyfarth Shaw expects more of these lawsuits to come in 2018. That is bad news for many employers because defending and settling lawsuits can significantly affect an organization’s bottom line. For example, in a case settled in May, plaintiffs alleged that Philips North America LLC paid too much for its investment management and administrative services. While the company said in court documents that it did nothing wrong, a U.S. District Court preliminarily approved a $17 million payment to participants in its 401(k) plan.

In today’s litigious environment, it’s risky for plan sponsors be unaware of how much service providers are charging. Even successfully defending an allegation of paying excessive investment or administrative fees can be costly in terms of time, resources and money. BDO has found that many plan sponsors are calculating and analyzing their plan fees on a regular basis. As a result of those reviews, many are able to reduce service provider fees. Federal law binds plan sponsors with the duty of acting in the best interest of the participant, so it’s imperative to understand the liability associated with not knowing the types of fees, how they can be charged and how to determine whether the payment is reasonable.

Knowing your Fees

While plans can have varying types of fees, the two largest are investment and administrative fees. The investment fee is typically the largest 401(k) service charge and is usually charged as a percentage of the assets invested. This fee, often referred to as the expense ratio, is what is paid to manage the investments offered in the 401(k) plan.

Another form of investment fees are 12b-1 or revenue sharing fees. These are charges from mutual funds for their marketing and other distribution materials. These fees were sanctioned in the 1980s as a way to bring investors to mutual funds to lower the overall cost of the investment. Often, this charge is rolled into the expense ratio of a 401(k) plan.

The administrative fee is what is paid to service providers to run the plan; record keepers, accountants and legal services fall under this umbrella. According to NEPC’s 2017 Defined Contribution Plan and Fee Survey, 53 percent of plan sponsors pay a fixed fee per participant for record keeping services. This may be charged to plan participants directly or be covered by a portion of the fund expense ratio.

According to NEPC, the median plan record keeping fee for 2017 was $59 per participant, compared to $64 in 2015. The median investment fee ratio was 0.41 percent, compared to 0.46 in 2015.

It is important to note that as your plan grows in size, you have the ability to access lower cost class shares and effectively lower your annual expense ratio. When was the last time you revisited and renegotiated your plan fees with your service provider?

How Fees Affect Participants

According to a 2013 Department of Labor (DOL) paper on 401(k) fees, regardless of how the charges are paid, plan sponsors need to evaluate each arrangement on a regular basis. One of the reasons for this is because fees have a significant impact on the amount participants can save for retirement.

The DOL gave a simple example of an employee with 35 years left until retirement with $25,000 in a current 401(k) account. Using an average 7 percent rate of return over 35 years, no annual contributions and an annual service fee of 0.5 percent, the employee’s balance would grow to $227,000 at retirement. Changing the fee to 1.5 percent under the same scenario would lower the final balance to $163,000. So, a 1 percentage point difference in fees reduced the final account balance by 28 percent.

The important element to remember is that service providers need to give plan sponsors clear information on how much they are charging for services. The DOL instituted two rules in 2012 to help all parties understand how much is being charged and paid. The first rule instructs providers to give plan sponsors clear detail on their charges. The second requires plan sponsors to show participants how much they are paying for their 401(k).

Interestingly enough, even with this information, 37 percent of participants surveyed by TD Ameritrade earlier this year still think they don’t pay any 401(k) plan fees.

BDO Insight: Know Your Fees and Document Your Process

It’s important for plan sponsors to remember that every service offered in a 401(k) plan has a cost. Education, online tools, investments, legal and other elements that providers might say are included or free all contribute to the overall cost. It’s up to the plan sponsor to determine whether the overall fees are reasonable. In today’s environment, plan sponsors who don’t address these issues or don’t conduct periodic reviews of service fees may likely find themselves in a very costly lawsuit.

There are plenty of benchmarking services available to plan sponsors to see how your plan stacks up with similar-sized plans or industry. Usually investment advisors help with this feature, but there are several online services that can help. For Us All, a 401(k) advisory group, gives general guidance on investment fees, all-in bundled arrangements based on number of employees and other useful statistics. For example, For Us All uses data from other sources including the 401(k) Book of Averages to show that for a company with 50 to 199 employees, the national average expense ratio for funds is 1.09 percent

There isn’t a one-size-fits all solution for determining what’s reasonable; what makes sense for one plan may not be appropriate for another. As a result, it’s important for plan sponsors to document the process they use when choosing investments and service providers. Also, it’s important to remember that reasonable doesn’t always mean least expensive, nor does it suggest that higher fees generate better returns.

All of the components of a plan’s decision-making process need to follow written policy statements. Having policy statements outlining the plan’s purpose, the fiduciary obligations, selection process, how fees will be charged, paid and communicated, as well as other procedures, will help plan sponsors discharge their responsibilities more effectively.

If you’d like help to better understand your plan fees, contact a member of BDO’s ERISA team.

]]>Thu, 19 Jul 2018 04:00:00 GMTb55d67a7-e3e2-447d-9fad-9c6e9c6854ec
The TCJA lowered the top corporate federal tax rate from 35 percent to 21 percent. The change is significant for all companies, and especially companies that have ESOPs because it:

Generates additional cash flow for a company

Could boost net profits, which in turn would increase the value of the stock in the ESOP

Could result in a higher repurchase obligation because of the higher value of the stock in the ESOP

For C Corporations, the increased repurchase obligation may not be difficult to manage. In many cases, the rise in the repurchase obligation will be offset by increased cash flow as a result of the lower corporate tax rate.

For S Corporations or other pass-through entities, however, managing the increased repurchase obligation may be trickier. Because the tax obligation is passed through to the shareholders of the company, which in this case is a qualified retirement plan exempt from federal income tax, managing the higher repurchase obligation may be more difficult because there is no cash windfall from the lower corporate tax rate.

Because the reduction in the tax rate is so significant, ESOP-owned companies should consider taking a serious look at their plan in 2018. It’s possible that existing cash-management policies may not support the obligations under the new tax structure. Companies also need to understand how other changes enacted through the TCJA could affect their valuations and cash flows.

How ESOPs Are Structured and Valued

An ESOP is a type of defined contribution plan that has been around since the mid 1950s. Unlike a 401(k) that invests in a wide range of investments, an ESOP invests primarily in the employer’s own stock. As a result, employees collectively own part or all of a company.

As of 2015 (the most recent data available), there were nearly 7,000 ESOPs with about $1.3 trillion in assets and 14.4 million participants, according to data from the National Center for Employee Ownership. ESOPs receive special tax treatment and have been used primarily by private companies as a way to retain and incentivize employees and/or provide an exit strategy for company owners who want an alternative path to liquidity. ESOPs are not cookie-cutter strategies; they are uniquely structured to benefit each company, its owners and employees.

When a participant retires or leaves a company, the ESOP provides a benefit that is based on an employees’ account balance, which comprises shares of company stock. For privately-held companies, federal law requires that the ESOP buys the shares back from the participant. This future requirement to purchase vested and allocated shares from all participants is called a repurchase obligation. Depending upon how the plan is structured, and on the type of distribution to be made, payments may be completed over time or in a lump sum.

The amount of a company’s repurchase obligation is directly related to the value of its stock. For companies that aren’t publicly traded, an independent appraiser will determine the company’s valuation using one or a combination of three methods: discounted cash flow analysis, evaluation of comparable publicly traded companies or analysis of recent sales of comparable private companies. Generally speaking, the TCJA has been a tailwind to companies’ profitability and cash flows—leading to higher stock valuations regardless of which method is used.

Other Tax Reform Factors to Consider

While the reduced tax rate has boosted corporate profitability, the TCJA implemented other changes that could negatively affect a company’s profitability and tax liability. Most notably, the law decreases the maximum allowable interest deductions for businesses to 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) until 2022. After that, the limit becomes even more restrictive, at 30 percent of earnings before interest and taxes (EBIT).C Corporations with ESOPs may need to restructure loans to avoid hitting the limit on the amount of interest they can deduct. S Corporation ESOPs are exempt from federal income tax.

The TCJA also includes changes that could affect how employees plan for the capital gains taxes related to a potential sale of stock to an ESOP. Starting in 2018, the amount of state and local income taxes (including property taxes) that can be deducted from a taxpayer’s gross income is limited to $10,000. This new limitation—previously there was no limit—can be significant for employees who sell shares back to an ESOP and realize large capital gains on the stock in 2018 or beyond, particularly those who live in high-tax states such as California, New York, New Jersey and Illinois. In some cases, employees who sell appreciated shares to an ESOP may want to consider taking advantage of Internal Revenue Service Section 1042, which allows taxpayers to defer capital gains taxes on the sale of stock to an ESOP if the proceeds are reinvested in qualified replacement property and other requirements are met.

BDO Insight: Know Your Repurchase Obligation

Companies with an ESOP need to prepare for a potential increase in valuations in 2018 because of the reduction in corporate tax rates and other changes in the new tax law. In many cases, a repurchase obligation study is a good place to start. The study will help the company realize its repurchase obligations on an ongoing basis, gain visibility into its expected future cash flows and develop an updated funding strategy for the ESOP. This will help companies make well-informed decisions about their long-term capital spending strategies across the business.

It’s also important for companies to realize that there are many other aspects of the TCJA, beyond the reduction in corporate tax rates, that can influence a company’s profitability and tax liabilities. Companies need to take a holistic view of how the law will affect their future growth prospects, cash flows, valuations and repurchase obligations. BDO’s ESOP Advisory Service experts are available to help you understand the TCJA and how it impacts your defined contribution plan.

]]>Thu, 19 Jul 2018 04:00:00 GMT37641bef-222d-482b-a783-6a99d1f25bc9
The PBGC announced in the July 2 Federal Register that victims of natural disasters may use the Internal Revenue Service (IRS) instructions for late filings and deadlines found in its disaster relief news releases. Victims will need to look at the IRS statement to determine whether they qualify, and they will need to notify the PBGC that they are eligible for the extension. For premium filings, the agency will not impose any late fees or interest on the payment if made within the relief timeframe.

In the past, the PBGC, which serves as the insurance backstop for defined benefit plans, has waited for the IRS to issue its disaster relief policy before following with an announcement. Filers had to wait for the PBGC to respond to the IRS announcement to make sure the PBGC was going to provide disaster relief. In many instances, the follow-up information was boilerplate and did not give any new details.

The July 2 Federal Register notice serves as a one-time announcement outlining the qualifications and procedures to follow each time the IRS issues a disaster relief news release. The notice clarifies how the PBGC relief is tied to the IRS disaster relief news; it also explains other details including the types of filings covered, how to notify the PBGC and exceptions to the rule.

In addition, filers will be able to request relief for issues not covered by the general announcement.

The agency’s new policy applies to disasters covered by an IRS disaster relief news release on or after July 2, 2018.CONTACT

]]>Mon, 16 Jul 2018 04:00:00 GMTc3cc7431-776f-45a1-95ea-b4485e37e9ef
The key features of the change are - merging existing revenue standards, coming up with a single comprehensive framework to recognise revenue and introducing an in-depth five step model to apply the core principle of Ind AS 115.

]]>Mon, 16 Jul 2018 04:00:00 GMTc0796141-7ab1-45f4-b42a-72e501a8dd6dth, the SEC adopted amendments to the definition of a smaller reporting company[1] (SRC) and its XBRL requirements.

SRC Definition

The amendments increase the financial thresholds in the SRC definition, thereby expanding the number of companies eligible for the scaled disclosures permitted by Regulation S-K and Regulation S-X. The financial thresholds in the definitions of accelerated and large accelerated filer and the related filing requirements (including those related to obtaining audits of internal control over financial reporting) remain unchanged.

Under the amended initial qualification thresholds, a company with less than $250 million of public float qualifies as a SRC. In addition, a company with less than $100 million in annual revenues qualifies if it has either no public float or a public float of less than $700 million. The following table summarizes the new initial qualification thresholds, as compared to the prior thresholds:

SRC Criteria

Prior Definition

New Definition

Public Float

Less than $75 million of public float at end of second fiscal quarter

Less than $250 million of public float at end of second fiscal quarter

Revenues

Less than $50 million of revenues in most recent fiscal year and no public float at the end of the second fiscal quarter

Less than $100 million of revenues in most recent fiscal year and no public float or less than $700 million in public float at the end of the second fiscal quarter

The amendments also increase the financial thresholds for a company that is not a SRC to enter SRC status, which are set at 80% of the initial qualification thresholds outlined above. For example, a company may enter SRC status when its public float falls below $200 million at the measurement date. In addition, a company that is not a SRC because it exceeded either or both of the $100 million annual revenue and $700 million public float thresholds may enter SRC status when it meets 80% of the criteria on which it previously failed to qualify ($80 million of annual revenue and $560 million of public float) and continues to meet any threshold it previously satisfied ($100 million of annual revenue and $700 million of public float). The following table summarizes the subsequent qualification thresholds:

SRC Criteria

Prior Definition

New Definition

Subsequent Qualification Based on Public Float

Less than $50 million of public float at end of second fiscal quarter

Less than $200 million of public float at end of second fiscal quarter

Subsequent Qualification Based on Revenues

Less than $40 million of revenues in most recent fiscal year and no public float

Less than $80 million of revenues in most recent fiscal year, if it previously had $100 million or more of annual revenues;** and

Less than $560 million of public float, if it previously had $700 million or more of public float**

** A registrant must satisfy a lower threshold only with respect to the threshold it previously exceeded. For example, if a registrant with less than $700 million of public float lost SRC status because its annual revenues exceeded $100 million, it can re-enter SRC status if its revenues drop below $80 million (i.e., public float does not also need to be below $560 million for the registrant to re-enter SRC status).

The prior definitions of accelerated and large accelerated filer contained a provision that automatically excluded registrants that qualified as SRCs. The final rule eliminates that provision, while maintaining the financial thresholds in the definitions of accelerated filer (i.e., $75 million of public float) and large accelerated filer (i.e., $700 million of public float). Therefore, companies with public float of $75 million or more, but less than $250 million,[2] that qualify as SRCs under the amended definition, would still be subject to the accelerated filing requirements, including the accelerated timing of filing periodic reports and the requirement to provide the auditor’s attestation on management’s assessment of internal control over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. However, SEC Chairman Clayton has directed to the staff to develop recommendations for the Commission to consider which would amend the accelerated filer definition and potentially reduce the number of companies that qualify as accelerated filers.

The Commission also made conforming changes to Rule 3-05 of Regulation S-X. Rule 3-05 requires financial statements of businesses acquired or to be acquired. Rule 3-05(b)(2)(iv) previously allowed registrants to omit such financial statements for the earliest of three fiscal years required if the net revenues of the business acquired or to be acquired are less than $50 million. The Commission increased this revenue threshold in Rule 3-05 to $100 million in line with the amendments to the SRC definition.

The amendments, which become effective 60 days after they are published in the Federal Register, can be found here on the SEC’s website.

Inline XBRL

The SEC also amended its XBRL reporting requirements to require the use of “Inline XBRL,” which will allow the financial statements to be both human-readable and machine-readable. Historically, issuers have been required to provide XBRL data in an exhibit to their filings. Consequently, issuers copy their financial statement information into a separate document and tag it in XBRL. The amendments require issuers to embed XBRL tags directly in their financial statements using a format known as Inline XBRL in lieu of providing tagged data in a separate exhibit. The intent of the amendments is to reduce the preparation costs over time and improve the quality, timeliness and usefulness of the data, which benefits investors and other market participants.

The Inline XBRL requirements take effect based on filing status as follows:

June 15, 2019 – large accelerated filers that prepare their financial statements in accordance with U.S. GAAP;

June 15, 2020 – accelerated filers that prepare their financial statements in accordance with U.S. GAAP; and

June 15, 2021 – all other filers.

Form 10-Q filers will commence Inline XBRL reporting in their Form 10-Q for the first quarter ending on or after these dates.

Filers will be permitted to file using Inline XBRL prior to their compliance date once the SEC modifies its EDGAR system to accept submissions in Inline format. The SEC expects this to occur in March 2019.[3]

The requirement for companies to post XBRL data on their websites is eliminated upon the applicable effective date.

Currently, the information in XBRL files is excluded from the officer certification requirements, and issuers are not required to obtain assurance on such information from third parties, such as auditors. In the adopting release, the Commission noted that the change in format to Inline XBRL does not change this.

The amendments are available here on the SEC’s website.
For more information, please contact one of the following practice leaders:

[1] The smaller reporting company definition excludes investment companies, asset-backed issuers and majority-owned subsidiaries of a parent that is not a smaller reporting company.

[2] Or less than $700 million of public float if the company has less than $100 million in annual revenues.

[3] The SEC terminated its voluntary program which permitted, but did not require, issuers to use Inline XBRL. Companies may continue to voluntarily file in Inline XBRL until that time.

]]>Tue, 10 Jul 2018 04:00:00 GMT0e16069f-db6d-425f-a1cc-cc3794c746c8We’ve all received suspicious-looking emails asking us to provide personal information to redeem a prize that we’ve won or alerting us that someone we know needs financial help. By now, most of us recognize these scams—and don’t open the email.

But what if the message looked like it was coming from an official, known source? Would you open an email you thought was coming from your 401(k) service provider or the sponsor of your retirement plan?

It’s vitally important for plan sponsors to consider questions like these because retirement plans and the $28 trillion that they currently hold in the United States are major targets for cyber hackers. Cyber criminals are becoming increasingly sophisticated in targeting entities that manage vast amounts of assets and personal data—two characteristics inherent in retirement plans and their service providers.

Today, protecting stakeholders’ data is no longer just an issue that information technology departments need to worry about. By law, fiduciaries to 401(k) and other retirement plans have a duty to act in the best interests of the participant—and protecting sensitive online information is part of that job.

Understanding the Threat
Communications about plan benefits contain significant amounts of personal data including: Social Security number, birth dates, home address, salary, password and general payroll information. Service providers to retirement plans store much of that material as well. As a fiduciary to the plan, the plan sponsor has a responsibility to make sure all that information—whether it is stored directly or by a third-party service provider—is kept safe.

Just as stolen identities are often used to hack credit card accounts, they can be used by criminals to access 401(k) and other retirement accounts. If cyber criminals gain access to the proper information about a participant, they may be able to trick an ill-prepared call center employee into releasing additional account information or making an unauthorized distribution, loan or transfer.

In many cases, security breaches will trigger state and federal fines for plan sponsors, as well as expose them and their service providers to lawsuits by participants. In addition to these legal costs and potential damage to the company’s reputation, data breaches are extremely disruptive and time-consuming to deal with for plan sponsors, service providers and participants alike.

Recommendations for Plan Sponsors
While it’s impossible for any organization to be completely bullet proof when it comes to cybersecurity, there are basic steps that plan sponsors can take to improve data protection strategies and limit the threat of an attack. The Department of Labor’s Advisory Council on Employee Welfare and Pension Plans describes many of these practices in its report, Cybersecurity Considerations for Benefit Plans.

The report outlines cybersecurity issues that are specific to retirement plans and suggests that plan sponsors create a cybersecurity strategy that addresses the specific Plan concerns that complement the company’s overall cybersecurity plan. The DOL’s Advisory Council stressed that because each plan is unique, its cybersecurity management should be more than a checklist that simply mirrors language used across the industry. Instead, the cybersecurity plan should be tailored to the distinct characteristics of the benefit plan, its systems and its participants.

Before a breach happens, plans should have a risk management strategy in place. The DOL report identifies several considerations for plan sponsors as they develop their strategies, including:

Establishing who is responsible for designing, documenting, implementing and maintaining the strategy

Evaluating service provider security programs and documenting how they will gain access to sensitive data

Understanding current insurance coverage arrangements to determine whether additional protection is needed to adequately safeguard the plan sponsor and participants

Other organizations have developed initiatives that can help plans sponsors deal with cyber threats. The American Institute of Certified Public Accountants (AICPA) developed a cybersecurity risk management framework, SOC for Cybersecurity, to assist organizations as they communicate relevant and useful information about the effectiveness of their cybersecurity risk management programs. The AICPA also has created a Cybersecurity Resource Center to help organizations learn how to best protect data.

Given the complexity and rapidly evolving nature of cybersecurity threats, developing a plan to address and mitigate these risks can feel extremely daunting for plan sponsors. But as with any challenging endeavor, knowing where to start is essential. Building on the DOL’s recommendations above, BDO recommends that the following actions be part of a plan sponsor’s cybersecurity efforts:

Identify what information you manage that could be at risk

Monitor what service providers are doing to address risks at their organizations

Review existing frameworks and current industry developments through resources provided by the AICPA, SPARK, DOL and others

Review the AICPA’s SOC for Cybersecurity and ask service providers if they have adopted those practices

Understand your organization’s broader cybersecurity plan and identify ways it should be tailored to address the unique risks that retirement plans and participants face

These basic steps are just a starting point. It’s critical to remember that every plan and every organization is unique. No checklist or set of industry best practices will be sufficient in protecting your plan and your participants from the growing threat of data breaches.

BDO provides a range of cybersecurity services and solutions to help plan sponsors fulfill their fiduciary obligations in these areas, including: cyber risk assessment and security testing; cybersecurity strategy, policy and program design; and incident response planning. BDO can help you assess your plan’s current needs and assist in implementing an appropriate cybersecurity strategy today.

Strong First Half Has U.S. IPO Market on Track for Best Year Since 2014

After experiencing a major downturn in 2016, the U.S. market for initial public offerings (IPOs) bounced back significantly last year and that momentum has continued in 2018. The U.S. IPO market has performed impressively in the first half of the year, with offering activity (+36%), total proceeds raised (+40%) and new filings (+36%) all increasing significantly from the same period of a year ago.

Moreover, offering activity appears to be building momentum, with the number of IPO pricings jumping from 44 in Q1 to 61 in Q2, peaking in June with 28 deals.

The momentum in pricing activity and the increased deal size has offerings and proceeds on pace to exceed 200 offerings and $50 billion in proceeds for just the third time since the turn of the century. At the current pace, IPOs on U.S. exchanges are on track for the best year since 2014, when both offerings and proceeds reached the highest levels since the dot-com boom of 2000.*

Much of the turnaround can be attributed to a resilient stock market, the business-friendly new tax law, continued deregulation and, most importantly, the positive performance of the offerings that have come to market – both this year and last year.

“Last year the U.S. IPO market bounced back from two consecutive years of dwindling offerings and proceeds, however, given the strength of the overall economy and strong stock market performance, many observers were surprised that even more businesses didn’t pursue a public offering in 2017,” said Paula Hamric, Partner in BDO USA’s National SEC Practice. “In 2018, higher pricings and favorable returns appear to have alleviated previous concerns with going public, with more than 100 IPOs on U.S. exchanges in the first six months of the year and an even larger number of businesses filing for a future offering.”

Industries

The healthcare and technology sectors have been the clear leaders among this year’s offerings.

Healthcare IPOs, driven in large part by many biotech offerings that have priced at or above their proposed range, have more than doubled from the first six months of 2017 and are on pace to lead all industries in IPOs for the sixth consecutive year. Technology offerings are up 81 percent year-over-year as the strong performance of recent tech IPOs has encouraged some mature technology companies to pursue the public markets.

Overall, there are six industries on pace to achieve double digits in number of offerings in 2018. Below is a breakdown of this year’s IPOs by sector:

“Healthcare and technology are the key drivers of the jump in IPOs in 2018. The increase in tech offerings is especially promising for the U.S. IPO market,” said Ted Vaughan, Partner in the Capital Markets Practice of BDO USA. “For several years, the plethora of available private funding at high valuations has led many Silicon Valley start-ups to steer away from public offerings and the potential for less favorable valuations. However, the strong performance of technology IPOs over the past 18 months is leading to more offerings from this sector and increased expectations that major offerings from Uber, Airbnb and other ‘tech unicorns’ may be on the way.”

Forecast

With shares of newly public companies performing well – returning an average of 26 percent from their offering price – the IPO window appears to be wide open for the remainder of 2018 as capital markets are largely receptive to offerings from a wide breadth of industries. Absent an unforeseen shock to the market, the pace of offerings should continue to accelerate during the second half of the year.

While the IPO forecast for 2018 is very promising right now, there are potential threats on the horizon that can swiftly change that outlook in the very connected world we live in. The escalating trade war, upcoming mid-term elections and international news - ranging from leadership elections to the ongoing negotiations with North Korea – all have the ability to swiftly impact U.S. markets and introduce a level of volatility that is not conducive for businesses considering a public offering.

“The strong pricing and aftermarket activity for IPOs thus far in 2018 should encourage even more businesses to enter the public markets this year,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA. “The jump in activity at the close of Q2 should continue in July as offering companies attempt to price prior to the traditional August lull and, more importantly, avoid any growing uncertainty about the fall mid-term elections and how they might affect the markets.”

For more information on BDO’s Capital Markets services, please contact one of the regional leaders:

* Renaissance Capital is the source for all historical data related to the number, size and returns of U.S. IPOs.]]>Thu, 05 Jul 2018 04:00:00 GMT1b3ff06b-0b93-4554-a6ed-d3ba8ffd03ceThis article is the latest in BDO’s ongoing series about how plans sponsors can improve their employees’ financial well-being. In May, we published an article about helping women prepare for retirement, and now we look at several factors employers may want to consider about how their male employees are preparing for retirement.

Many sitcoms and comedians have played with the stereotype that male drivers are notoriously reluctant to stop and ask for directions. According to research, this reluctance to ask for help also affects men as they head toward retirement—and what that means for employees’ financial well-being isn’t anything to joke about.

MassMutual examined gender financial issues and found that men are less interested than women in receiving financial planning services, budgeting assistance, debt counseling and other financial education programs from their employers. Fidelity conducted research specifically for BDO and found that at the end of the first quarter of 2018, 41 percent of men didn’t have their investments allocated appropriately for their age group.

This statistic should grab the attention of men and their employers, because it directly impacts the financial wellbeing of employees. Those employees who are worried about their finances, may negatively affect workplace productivity. In fact, a recent survey by consulting firm Mercer found that financial stress is costing employers about $250 billion in lost wages each year. As a result, companies should identify ways to improve their employees’ financial well-being, and part of this effort should involve understanding their male employees’ retirement savings habits.

Men Are Saving for Retirement, But...

It’s true that men, on average, have larger retirement account balances and prioritize saving for retirement more highly than women. But that doesn’t mean that men are doing just fine when it comes to retirement saving.

In its How America Saves 2018 report, The Vanguard Group found that men and women participate in their defined contribution plans at similar levels overall, however, disparities appear when this data point is analyzed by income levels. For example, only 74 percent of men earning between $50,000 and $74,000 annually participate in their defined contribution plan, compared to 86 percent of women. Meanwhile, men are contributing a lower percentage of their pay to defined contribution accounts, Vanguard found. For example, in that same earnings bracket, women saved 7 percent of pay compared to men saving 6.8 percent.

Fidelity Investments looked at the disparity between how men and women save for retirement and had findings similar to Vanguard. The research found that women tend to save a higher percentage of their salary than men (9.0 % vs. 8.6%) and generated a higher annual rate of return (6.4% vs. 6.0%).

How Employers Can Help

As employers look for ways to improve financial well-being across their entire workforce, a good place to start is by gaining a better understanding of the saving and investing habits of various demographic groups of employees. Many record keepers and other service providers can offer information to help plan sponsors better understand their employees’ needs. Providers can analyze segments of a company’s workforce to pinpoint gaps, learn what motivates employees and offer possible solutions.

For example, plan sponsors may want to look to see if there are differences in the risk profiles of their employees’ retirement portfolios across genders, age groups or income levels. With this information, plan sponsors can tailor communications strategies to address any suboptimal investment practices by each group.

Employers also may want to harness some of the recent findings from the burgeoning field of behavioral finance. Rather than simply assuming that humans will act rationally, behavioral finance looks at some of the cognitive biases that affect people’s decision-making when it comes to finances. By understanding these biases and tendencies, plan sponsors can better identify some of the traps that employees may fall into and communicate with employees in a way that aligns with how they actually make decisions.

Behavioral finance has found that inertia is a powerful force when it comes to preparing for retirement. Plan designs like automatic enrollment and auto escalation take advantage of the power of inertia and can help put employees on a successful path to retirement. Also, online tools that prepopulate with data from healthcare and retirement plan providers, which remove some of the friction and barriers to good decision-making, can make it easier for employees to take action to improve their financial well-being.

The lack of preparedness for retirement is certainly not a gender-specific issue. According to MassMutual’s study, nearly three-fourths of both genders (74 percent of women and 71 percent of men) aren’t saving enough for retirement.

When it comes to men specifically, Fidelity’s finding that 41 percent of men didn’t have their investments allocated appropriately for their age group actually represents a positive trend. The figure has decreased 13 percentage points over the last five years. This improvement can most likely be largely attributed to the increased use of target-date funds, which are professionally managed accounts that are tailored to the retirement age of users.

To continue building on this positive trend, employers should educate employees on the importance of developing an appropriate asset allocation strategy, as well as on the tools and investment options that are available for implementing this strategy. This education, along with finding ways to reduce the friction and make it easier for employees to save for retirement, should be an important part of companies’ financial well-being programs.

Also, plan sponsors should encourage employees to realize that a family’s long-term financial planning shouldn’t be the responsibility of just one family member. Rather, all of the adults in the family should be involved in the big picture discussions about saving for retirement, budgeting and insurance.

To learn more about how you can help your employees prepare for retirement and improve their financial well-being, BDO’s ERISA team is here to help.

]]>Wed, 27 Jun 2018 04:00:00 GMT88286746-3ad8-4bd8-b344-32fb2dfdc9f2
Our clients are evaluating and adjusting their business models and approaches to keep up with—and take advantage of— disruptive changes in the world of business, and so must we. As an audit firm, BDO USA, LLP1 continually refines our approach to serving clients with an eye on both external and internal factors. It is our intent and commitment to deliver high quality audits and provide our clients with deep insights and value.

We recognize that we cannot deliver quality audits unless we have the trust of both those who oversee our work and those who rely on it. To build upon that trust, we are deliberate in both our commitment and actions, and strive to achieve the highest audit quality.

With a focus on delivering the highest possible audit quality, we design and execute efficient, compliant audits that are (1) delivered by technically competent and thoughtful professionals, (2) are valued by our clients, and (3) can be relied on with confidence by capital markets.

Our Audit Quality Statement of Intent and the commitment we expect of our auditors are the foundation of all of our actions, supported by our exceptional people and the expressed tone of our leaders. This is what enables our focus on driving the evolution of the audit, our responsiveness to market needs, and our efforts to constantly move toward greater audit quality. It is this foundation that allows us to execute our audit engagements through the lens of a quality-centric and evaluative mindset.

This report is our opportunity to “open our books” for review. It lays out in detail how BDO is choosing to proactively work within our firm and with the profession, regulators, and other key stakeholders to carry out and deliver on our audit quality intent.
Our Audit Quality Statement of Intent succinctly explains how we approach our audit engagements. But to truly appreciate the passion with which we pursue this goal, it is important to understand why we are so committed to audit quality.

Put simply, we believe that audit quality is the cornerstone of trust in financial reporting and financial markets.

Without trust, capital markets cannot function efficiently and innovation cannot thrive. In an era of rapid change and disruption across industries, trust is more important than ever.

We also believe that people will always be the core of audit quality. While technology and integrated processes can make an auditor more effective and efficient, the success of an audit depends on people who have high caliber skills, expertise, and judgment. People analyze data and identify risks. People gather all necessary insight to discuss, manage, and ultimately, make important judgments during the most challenging moments of an audit. Even as we continually look for ways to fully leverage cutting-edge tools to strengthen our ability to deliver audit quality, we do not discount the value added by well-developed and skilled people.

This Statement of Intent is part of who we are and represents our commitment to our clients and to our profession. It is the responsibility of every BDO auditor to demonstrate professional skepticism and to take an unbiased approach that focuses on evaluating the facts, seeking the truth, standing firm in the face of adversity, and bringing clients the right answers through the right services.

To fulfill our responsibilities as auditors and deliver on our intent every day, we embrace professional skepticism in everything we do and are ready to address every expectation of regulators, boards of directors, the auditing profession, and ultimately, ourselves. We are continually refining and improving our tools and guidance to enhance audit quality. We are also investing time, ideas, and resources to supporting the research and development of the “audit of the future.”

Beyond these ongoing actions, we make these seven commitments to our clients and other key stakeholders:

We commit to assuming both individual and collective responsibility for every audit.

We commit to leading in the field by making appropriate judgments in real time and supporting our people in their pursuit of audit quality.

We commit to continuous learning—our own and that of our clients— making time to pursue continuing education, explaining and guiding those with whom we work, and exploring with curiosity what we need to achieve.

We commit to knowing and applying the professional standards and all firm guidance effectively in delivering our work. We do not “go it alone.” Instead, we use the guidelines and parameters BDO has painstakingly established.

We commit to approaching every moment of our day with the mindset of an evaluator. As an evaluator, we seek out the facts, consider the applicable literature, evaluate the alternatives, and then present persuasive judgments.

We commit to seeking and implementing change and not becoming attached to the status quo or old orthodoxies. Instead, we will transform what we do every day, in every way.

We commit to involving others, both when it is required and when it is not. Collaboration strengthens our own judgments, helps us to find and seek the right answers, and makes us better professionals.

Audit quality is a never-ending pursuit. As our clients’ businesses and industries evolve and the nature of the audit adjusts in response, BDO’s focus on audit quality and the commitments we make will never waver.

The following sections of our report underscore how we live each of these commitments every day.

1 BDO is the U.S. member firm of BDO International Limited, a UK Company limited by guarantee, and forms part of the international BDO network of independent member firms.

]]>Wed, 27 Jun 2018 04:00:00 GMTa1428ca6-e4c8-4380-94e9-a5c42091a777

Fourteen hundred new staff members, of who 57% are assurance professionals, were recruited from 195 top colleges and universities and included participants from our highly successful Pathway to Success program. Close to 300 experienced Assurance hires are drawn from both the profession and industry to expand the depth within specialty areas, including cybersecurity, income tax, and accounting and reporting advisory services.

We are extremely proud of the auditing team that we have built at BDO, a team made up of distinctive and talented individuals who are dedicated to the craft of auditing and passionate about serving their clients. We are excited to share some of the ways that we are empowering our people to continually expand their skills and their ability to serve our clients.

"We are extremely proud of the progress we continue to make in building a diverse workplace environment. Our workplace combines diversity in gender, race, and ethnicity with diversity in thought and experience in order to break down barriers that inhibit innovative solutions and problem solving.”

CATHY MOY
Chief People Officer

A Culture That Demands Diverse Thinking and Fosters Excellence

Our clients, and the industry, expect excellence in every audit that we perform. We hold our people to this same standard. As a result, we are in the business of finding talented auditors and equipping them with a diverse yet inclusive environment that welcomes new ideas and perspectives and is supported by industry-leading education, resources, and guidance.

An important part of this education is helping our auditors develop a deep well of professional skepticism. We teach them to ask the right questions and view everything they encounter during an audit engagement with the “mindset of an evaluator.” Another way that we help them achieve excellence is through our sustainable and compliant audit delivery system that provides consistency in each engagement. No matter what the circumstances, our people follow the same process with the same rigor. Outside of individual audit engagements, our people are fully involved in firm-wide efforts to drive innovation in the audit process, anticipate market needs, and cultivate our best-in-class organization.

This work has paid off handsomely. Our people have the skills, tools, and knowledge our clients expect and they apply them using the right frame of mind. Our people adhere to extremely high standards of professionalism and exhibit independence from our clients—in fact, in appearance, and in thought. Our people focus on listening and collaborating to deliver sound solutions that have been tested and considered from multiple perspectives.

A Differentiated Approach to Performance Management

The cornerstone of our performance management philosophy is providing our people with clear goals and timely feedback at all levels in the organization. We teach our professionals to set meaningful goals that directly tie to measurable performance objectives aligned with audit quality. We empower our leaders to provide feedback and coaching to help individuals achieve their performance objectives and increase each auditor’s engagement in their work.

To create an environment that fosters our shared commitment to audit quality, our audit partners and leaders undergo regular quality assessments, conducted by our Audit Quality Committee3. Each partner’s compensation, engagement supervision, and workload assignments are based, in large part, on his or her audit quality ratings.

Continuous learning is another central element of our approach to performance management. Education and training is recognized by all of our professionals as essential to staying on top of evolving auditing and accounting standards as well as latest industry trends. Over the past year, our over 2,700 Assurance professionals have earned more than 160,000 Continuing Professional Education (CPE) hours inclusive of accounting, auditing, business acumen, and industry focus, among other professional topics. Annual hours ranged from 30 to 42 hours of recommended level-specific accounting and auditing curriculum, which approximated sixty percent of total CPE delivered to our Assurance professionals. The rest of that time represents our people going above and beyond professional requirements4 to increase their knowledge and capabilities.

As a firm, we are continually evaluating our learning curriculum and coursework to make sure they reflect current accounting, reporting, and auditing standards. All of our professionals are expected to take a core curriculum focused on both issuer and non-issuer client engagements. For our professionals who work on issuer engagements, we have established certification requirements where, in addition to mandatory learning assignments, they must additionally complete at least 200 cumulative hours of issuer audit experience every two years.

Empowering People Through Emerging Opportunities

BDO’s work in shaping the audit of the future is yielding tremendous benefits for our people. Being at the front lines of technologies like blockchain, data analytics, and other emerging forces that are shaping the auditing industry creates important opportunities for our team members to expand their skillsets and tackle new challenges. Our professionals’ eagerness to learn is illustrated by the consistently overwhelming interest from internal applicants whenever we create new jobs or teams related to these and other emerging areas.

Our people can also choose among plentiful secondment opportunities. Assurance professionals may apply for opportunities lasting from three months to two years. These opportunities involve working within various departments of our National Assurance Office to cultivate technical and consulting skills before bringing that knowledge back to their local practices. Other professionals gain international experience by leveraging our BDO International network for a two-year assignment abroad. We believe that this cross-disciplinary exposure fundamentally increases our auditors’ skills in their core practice areas and allows enhanced technical and global perspectives to spread throughout our firm.

All of these opportunities, and the resulting excitement, create a virtuous cycle for our firm and our clients. It further serves as an effective attraction and retention strategy in cultivating the types of professionals who are motivated by continuous learning—exactly the kinds of people who make great auditors.

Building Flexibility, Consistency, and Sustainability

The success of our efforts to attract, retain, and nurture the best audit talent is measured, in part, by the flexibility and stability of our workforce. We are fully supportive of a flexible yet connected work environment that allows our professionals to continue to pursue rewarding careers while managing personal commitments. This, combined with the strategies discussed above, has led to strong retention rates, particularly at the more experienced levels.

Strong talent retention allows us to build long-term relationships with clients and maintain continuity through engagement team members on client assignments year after year. The result is a consistent experience that minimizes service disruptions and allows our professionals to draw on institutional knowledge about the client and its industry. At a time marked by significant changes in standard-setting and rapid changes to technologies being deployed in our audits, we can reassure our clients that some things will remain the same.

We also believe that our focus on building deep relationships—with clients, peers throughout the industry, and each other—is a vital part of our quality-centric culture. Client relationships thrive on frequent contact, idea sharing, and deep discussions about clients’ business challenges, goals, and requirements. Strong relationships with colleagues based on mutual respect and trust are crucial to professional growth and learning. Relationships with peers outside of BDO help our professionals gain valuable perspective on the future of audit work and the evolving demands being placed on the industry. All of these relationships, and the knowledge we gain from them, enhance our ability to serve clients.

Read Previous3 Our Audit Quality Committee is comprised of a complement of National Assurance Office professionals and audit practice leaders who assess our partners through both a technical and a client-service lens.

4 The American Institute of Certified Public Accountants (AICPA) requires CPAs to complete 120 hours or its equivalent of continuing professional education (CPE) over a three-year reporting period.

]]>Tue, 26 Jun 2018 04:00:00 GMT67b6ca01-f79c-4d69-b254-3b9583d9df47
function hideReveal(div) {
$(".textDisplay").css("display", "none");
$("#" + div).css("display", "block");
}
Any structure is only as strong as its foundation. The initiatives discussed in this report are supported by the many investments in time, energy, and resources we have made over many years to create and sustain a best-in-class organization at BDO.

Our work in building an auditing practice that continually stays at the leading edge of our clients’ needs and the industry’s demands will never be finished. In 2017 and into 2018, we continue to sharpen our focus on performance management and accountability, with an emphasis on further enhancements to our audit approach and the development of our professional skepticism framework. In addition to these and other initiatives, we continually improve in other areas of our operations. In particular, we are committed to expanding our skillsets and adding the leadership necessary to bring a fresh perspective to the challenges facing the audit industry and our clients.

Expanding the Reach of our National Assurance Office

BDO’s National Assurance Office is the centerpiece of ensuring our continued excellence in audit. The resources we have invested in National Assurance have led to an increase in staff of 74% since 2014, which has helped to transform the office into a hub for all of our audit quality efforts to benefit both our clients and our entire Assurance practice. National Assurance further serves as a clearinghouse of consultative and technical knowledge, professional coaching and development support, and education. This group also plays a major role in innovation, monitoring, and accountability.

National Assurance Organization

BDO’s National Assurance has been defined along operational areas overseen by our National Assurance Managing Partner of Audit Quality and Professional Practice, who directly reports to BDO’s Chief Executive Officer. This reporting structure helps to ensure that our CEO is directly dialed into audit quality processes and is better able to operationally support and convey important messaging about audit quality expectations to all of our BDO professionals.

Click the image to view larger version.

We have also made important changes to the operational audit areas overseen by National Assurance. This demonstrates how seriously we take our commitment to our clients and our client-serving professionals.

Click on a tab below to learn more.

National Audit

In July 2017, we reorganized oversight of our audit operations under a new National Assurance Managing Partner of Auditing and created distinct partner-led areas of focus relative to:

Internal Control Over Financial Reporting (ICFR) Audits

Focused Coaching

Engagement Enhancement and Remediation

Audit Methodology and Consultation

Audit Tools, Technology, Templates and Approaches

Internal Learning, Deployment and Change Management

This alignment, coupled with our newly introduced National Audit Development Cycle (see Figure 3), allows us to create and deliver practice solutions within a rigorous,

Audit Quality Network The ability to adapt to change and then implement new approaches across all client engagements are critical skills for auditing firms today. As an extension of National Assurance, our Audit Quality Network5 provides a direct communication channel between our local offices and the National Assurance practice, increasing the flow of information and feedback throughout the firm. This model further leverages our Audit Quality Directors (AQDs), increased in 2017 to 30 select senior managers, directors, and partners who promote audit quality in their local offices and on a regional level. The AQDs support projects in key areas, including ICFR execution, data analytics, audit methodology and consultations, and audit tools, technology, and methods.

AQDs provide over 16,000 hours per year in support of audit quality.

Accounting Excellence
Our best-in-class National Accounting Group is led by the National Managing Partner of Accounting, a former SEC Fellow. The Accounting Group provides state-of-the-art accounting guidance to the audit practice and consists of seasoned technical professionals who share a commitment to excellence and quality. Recent enhancements to our accounting practice include:

Fully implementing a consultation database to facilitate information sharing and trend analysis for both the practice and our clients.

Emphasizing ongoing and timely education for our clients on significant new accounting standards, including revenue recognition, lease accounting, current expected credit loss (CECL) and changes to U.S. tax laws.

Regional and Assistant Regional Technical Partners and Directors
Certain professionals serve as direct extensions of National Assurance in our practice offices. As part of National Assurance, these leaders report to the Quality Control group and are tasked with helping to communicate tone for audit quality and maintaining the firm’s standards of technical competence and risk management in accounting and auditing within their regions and offices.

Independence
As our clients expand their businesses domestically and internationally, ensuring auditor independence is more important—and more difficult—than ever. In a global business environment, we continually assess and adapt our protocols for maintaining our independence in every audit engagement. Investments in and activities led by our National Independence practice are powerful evidence of our commitment to checking and avoiding potential conflicts in our auditing work.

Our Independence practice, newly led by the former Senior Director of Professional Ethics at the American Institute of Certified Public Accountants (AICPA), helps our professionals and partners understand their role in maintaining auditor independence. More specifically, our National Partner of Independence is spearheading efforts to enhance our conflict-checking system, establish new independence sanctioning guidelines, focus on education by refreshing annual training, and lauch a quarterly publication covering important and timely independence issues. Our specialty practices that provide tax and cybersecurity services are also getting involved by updating policies to maintain our independence during all client engagements.

Promoting Audit Quality at the Engagement and Firm Levels

At BDO, we measure audit quality at both the client engagement level as well as the firm level.

Audit Milestones

Recognizing the impact on audit quality of an orderly, timely, and sequenced audit process that occurs over a predictable time period, we follow a series of audit milestones when executing our audits. The use of audit milestones forces discipline into and throughout the audit process by fostering earlier risk identification and assessment. This, in turn, enables appropriate planning, design, and performance of audit work in a sequence to allow more structured time for areas requiring significant judgment.

Engagement Support

Issuing an audit opinion is an enormous responsibility. To support audit teams in performing a high quality audit that provides confidence to those who rely on our report, we require all audit teams to engage in activities which continually reassess and reaffirm the design of the audit and its effective execution. For example, engagement teams reconsider their risk assessments and audit response designs prior to concluding the audit to confirm that decisions made earlier in the audit cycle remain relevant. Our coaching programs, which leverage professionals from the National Assurance Audit Quality Team, provide audit teams with real-time feedback on risk assessment and audit execution.

In providing support to non-issuer audits, we intentionally align and distinguish resources—professionals, policies, tools and templates, education and methodology—to be distinctive in the work we do on private company audits. For example, our Private Company Audit Innovations (PCAI) team continually surveys our auditors to identify opportunities to increase efficiencies without sacrificing quality through streamlining, standardizing, and focusing audit procedures, while simultaneously ensuring adherence to relevant AICPA auditing standards. Efforts by the PCAI team emphasize differentiation and modification from public company engagements, with a focus on audit tools, guidance, and education for private company audit engagement teams. This will continue to be a key priority as our PCAI team accelerates its work this year.

Quality Control System

Turning our own auditing and analytical capabilities to matters of quality, we continue to execute a robust Quality Matters Process6 in support of our firm’s system of quality control to further drive audit quality accountability throughout our firm. Our assessment of the audit quality of our audit partners requires identified partner Audit Quality Events (AQEs), along with regional and office leadership accountability components, to be separately and distinctly evaluated as part of the annual performance management process. These evaluations are directly correlated to both a professional’s compensation considerations as well as his/her client engagement assignments.

For example, we rigorously examine all AQEs (both positive and negative) that occur during audits. Positive quality events often highlight an auditor’s independence, professional judgment, backbone, and accountability. Our auditors are steadfast in their commitment to reaching the correct accounting or auditing result regardless of client or internal pressure—even to the point of refusing to release an audit report if a client will not modify an improper accounting treatment that might be material to the financial statements.

Positive/Negative Quality Events

We have pre-established certain criteria for both for positive quality events and negative quality events—to assess these events when they arise in practice. Here are a few examples:

Positive

Resolute determination was displayed to reach the correct accounting orauditing result regardless of client orinternal pressures.

Significant, active involvement in anengagement which demonstrated a focus on critical accounting and auditing areas and a tone with respect to audit quality.

Effective display of strong accounting and auditing knowledge and ability to support conclusions reached.

An inspection occurred and evidence of strong audit quality was present.

Negative

Poor tone has been demonstrated with respect to a continued and biased support of a client’s improper accounting or disclosure position.

Substantial lack of involvement in an engagement was identified with regard to critical accounting and audit areas and/or poor tone with respect to audit quality.

Substantial lack of involvement on significant technical matters was identified during an audit.

An inspection occurred and a significant finding was made or restatement occurred.

Inspection Process

We gain significant insight from our internal and external inspection processes and use this knowledge to continuously adapt our firm-wide system of quality control.

Internal Inspections

Our internal inspection teams comprise partners, directors, and senior managers with appropriate technical knowledge, industry experience, and training to conduct a formal risk-based inspection of the firm’s assurance practice under the direction of the National Partner of Inspections.

A partner may be selected for inspection in any given year, and generally partners are subject to review at least once every three years. These reviews are conducted to:

Determine the quality of work performed

Confirm that our work complies with professional standards and firm policies and procedures

Monitor the effectiveness of remedial actions

The inspection team reviews, on a sample basis, the working papers and reports of each selected assurance engagement. The firm’s inspection program also includes a review of compliance with our quality control policies and procedures in other areas, including ethics, client acceptance and continuance, consultations, human resources, and other matters. These reviews involve focus group sessions with professional staff to help ensure the firm’s quality control procedures are properly understood.

As a registered public accounting firm conducting over 300 issuer audit engagements, we must comply with annual inspection requirements of the PCAOB. The PCAOB’s inspection reports consist of two parts:

Part I: Public Portion
This section reports findings relating to specific audit engagements in which audit deficiencies may affect a firm’s ability to support its audit opinion. In addressing these findings, a firm takes appropriate corrective actions, including possible additional documentation or audit procedures (known as engagement remediation), and/or in rare cases revises its report. The inspection report and our response to the report can be found at: pcaobus.org/Inspections/Reports/Documents/104-2017-030-BDO.pdf.

Key findings in BDO’s 2015 report, the most current report available, align with findings across the profession and center primarily on testing of internal controls over financial reporting, management’s estimates, sampling, use of substantive analytical procedures and journal entries.

Part II: Non-Public Portion
This portion includes the PCAOB’s observations relating to a firm’s audit performance and quality controls where improvements are recommended. In evaluating a firm’s quality controls, the PCAOB assesses the following areas as part of that inspection:

Policies and procedures for considering and addressing the risks involved in accepting and retaining clients

Processes related to the firm’s use of audit work that the firm’s foreign affiliates perform on the foreign operations of the firm’s U.S. issuer audit clients

The firm’s processes for monitoring audit performance, including processes for identifying and assessing indicators of deficiencies in audit performance, independence policies and procedures, and processes for responding to weaknesses in quality control

Our most recent completed remediation activities that the PCAOB have assessed relate to the 2013 inspection of audits of 2012, for which the remediation period ended in October 2015. The PCAOB has accepted our remediation activities with respect to that period.

We consider the PCAOB inspection process along with our internal inspections to be valuable components of our firm’s overall approach to enhancing audit quality. Accordingly, we take inspection comments with the utmost seriousness, giving them prompt consideration. As outlined in this current and prior Audit Quality reports (2016, 2017) shared publicly, we have made, and continue to make, significant enhancements to our audit quality process, including investments in appropriate national resources, tools, training and communication, as well as in the design of specific action plans and monitoring of such plans. We are confident that these improvements are addressing all matters raised in the inspection reports. We expect our increased diligence and attention to audit quality on our current year-end audits will lead to further improvement in 2018.

Other Inspections

BDO is subject to periodic Quality Assurance Reviews (QARs) on behalf of BDO International. The objective of a QAR is to provide assurance that BDO member firms adhere to, and comply with, applicable professional standards, as well as BDO International’s standards. Such reviews are conducted on a rotating basis. We have received a draft of our report which reflects an acceptable level of performance in all functional areas.

As a member of the AICPA, we are subject to triennial external peer reviews of the portion of our auditing practice applicable to non-issuer engagements. Our most recent completed Peer Review was conducted in 2015 for which we received a “pass” rating. We are currently undergoing Peer Review to be concluded in the fall of 2018.

We view inspections as critically important to informing our overall audit process and take the process and the resulting findings extremely seriously. In comparing our firm findings, we find a strong correlation with overall profession findings by the PCAOB, AICPA and peer reviews. We monitor these trends closely. Our careful analysis as to the causes of issues revealed by these inspections help to pinpoint any problem areas we need to address on a firm-wide basis, such as enabling communications, enhancing tools or providing of additional guidance and education. Many of these enhancements have been previously described.

Monitoring and Remediation

We vigilantly monitor and remediate any issues brought to light during an audit or during the inspection process. The areas where we have focused significant effort include:

Executing deep and specific risk assessment activities and linking them to effective controls and substantive responses

Demonstrating a deep and applied knowledge of ICFR

Performing a detailed audit focus on:

revenue-related topics

inventory

estimates

Operationally, we have gained insight from our cause analysis, monitoring and remediation, as well as from other inputs, including our National Assurance Survey, Quality Matters Process, Performance Management, and engagement team outreach. This insight has helped us to improve the timing of data collection and procedures to assess whether audit teams are applying tools and guidance in a timely way and to implement changes to learning programs in time to improve current year audit engagements.

Sustaining a Best-in-Class Organization

Defined activities allow us to act on our Audit Quality Statement of Intent (See Figure 4). The following is intended as a high-level summary of actions discussed in our current report where we have focused and will continue to focus on our unrelenting pursuit of audit quality.

Our quest to maintain a best-in-class organization involves many moving parts. It begins with our culture and the mindset of our people and extends to our leadership, our approach to innovation, and our responsiveness to the market. We are not relaxing our efforts. We continue to take specific and constructive steps every day to drive audit quality and shape the future of the audit.

Return to Main Report6 BDO’s Quality Matters Process is a formal process designed to identify, evaluate, and provide evidence of the causes of both engagement-specific and system audit quality events and develop actions to improve audit performance.

]]>Tue, 26 Jun 2018 04:00:00 GMT70c4dbef-4168-4ac6-b03a-ad367934f4c8As a leader in the audit profession, BDO is committed to providing the same level of transparency to our stakeholders as our clients provide to theirs. In that spirit of transparency, we believe it is valuable for us to share the highlights from our ongoing review of our audit practice.

We have become highly disciplined in reflecting on our own operations to ensure we are living up to our core values and identifying ways to improve. A central part of that accountability includes surveying our people to ask for their feedback and input on how to serve clients more effectively. Given their close relationships with clients and the countless hours they spend getting to know clients’ businesses, our people have an invaluable perspective to add as we determine whether the actions of our leaders and our firm are aligned with clients’ goals and the audit profession’s standards.

"We believe in supporting the integrity of capital markets through the attestation services we provide. We task our leaders with the important responsibility of continually identifying opportunities to enhance audit quality."

Taking Our Pulse

This survey shows how our people perceive the tone and content of leadership’s messages about quality. The survey also gauges how well the firm is supporting our professionals in their work. We rely on survey results to help guide our journey as a best-in-class organization.

The most current Pulse survey, conducted in 2017, indicated that as a firm, BDO is performing particularly well in communication, employee development, and articulating expectations during client engagements.

In a profession that is highly focused on retaining high-caliber employees, this finding shows that we are making significant progress toward keeping our people satisfied with their work and career prospects within BDO. This, in turn, provides stability and continuity for our clients.

There were also areas where we saw opportunities to grow and improve as a firm. With these results in mind, we immediately began developing plans to implement changes and then measure and report our progress. For example, we saw a clear need to tie audit quality metrics to everything BDO does, from leadership messaging to individual performance goals at all levels.

Surveys like this serve two purposes—to help ensure that we do not overlook problems or issues that need to be addressed and to develop a baseline of performance and a means to measure progress over time in critical areas of our operations. The power of this survey and the honest, insightful feedback it generates cannot be overstated. That is why leaders within our National Assurance Office recently added a second survey to the mix—to gain specific insight from the Assurance practice with respect to various elements of audit quality.

The first Audit Quality and Operational Excellence Survey was conducted this past year, asking questions of Assurance managers through partners. While the feedback was overwhelmingly positive and indicated that our people believe our leadership is focusing on the right priorities, the survey also proved to be a gold mine of ideas about how we can improve our audit work and the practice itself.

The most valuable part of the survey was the more than 700 substantive written suggestions we received. These suggestions emphasized both what we should keep doing and what we can do to continually improve. Many of these suggestions have already become the basis for adjustments to our way of doing things and have inspired a variety of initiatives designed to strengthen certain areas of operations and client engagement. Others are being proactively woven into near-term plans. Refer to Figure 2 for a snapshot of complete and ongoing activities noted throughout this report.

Assessing Our Strength

Our annual Pulse survey and our newly launched Audit Quality and Operational Excellence Survey provide valuable insight from our professionals about how the firm is fulfilling its commitment to best-in-class service. Highlights from the surveys include:

Pulse Survey

BDO professionals across our firm either agree or strongly agree with the following:

92% Our engagement teams and leaders clearly communicate expectations and are committed to executing high quality work for our clients

90% Firm and office leadership communicate clearly and often to our staff about BDO’s commitment to quality

93% At least one of the leaders in their practice or department cares about their development

92% I am empowered to use my own judgment to make decisions

95% I understand how my role contributes to the firm’s success

Audit Quality and Operational Excellence Survey

Our Assurance professionals specifically rate BDO as “very good” to “excellent” on the following statements on a five point scale:

Audit Quality and Operational Excellence

4.4 I understand what is expected of me with respect to audit quality

4.4 My Office Managing Partner is aligned with my executing audits with audit quality being a significant priority of the firm

Leading into the Future

We believe that our efforts to maintain a nimble and responsive organization are critical to our role as a leader in the auditing profession. With leadership who listens to our people and empowers change, we can more deftly identify opportunities for improvement and continually look for new and better ways to serve our clients. Our commitment to remaining a best-in-class organization depends on our ability not only to adjust to change as it happens but to anticipate change before it occurs. Our people on the front lines of audits are in the best position to help us accomplish that.

Figure 2. Identifying Areas for Growth
Getting feedback from our professionals is just one step on our path to audit quality. We are committed to turning what we find into action. Below are some of the key priorities that have emerged from our survey results and the steps we are taking to turn these ideas into tangible results.

]]>Tue, 26 Jun 2018 04:00:00 GMTdb3bb2bd-a4ce-4005-baf6-6dbd381fc9e9At BDO, we consider our reputation in the markets we serve to be both a responsibility and an opportunity. Our audit professionals do not view the audit simply as a compliance exercise. We know that our clients rely on and trust audits to provide not only the necessary financial reporting assurance for stakeholders but also important and actionable insight about the risks and opportunities facing their businesses.

Our auditors work to gain a full understanding of each client’s business so that we can help those organizations recognize the financial accounting ramifications of their decisions. That’s why we commit ourselves every day to building these types of client relationships and embracing our role as a true business partner.

Of course, this role includes advising on key business issues as soon as they arise. Our rapid response to U.S. tax reform and our ongoing efforts to help clients fortify their cybersecurity efforts are just two examples of how we look at the issues clients are facing holistically. In both cases, we have built teams of highly skilled professionals across our audit, tax, and advisory practices to help clients address their most pressing business challenges. The result is a cross-functional effort that draws on the knowledge of professionals who are on the front lines dealing with these issues for clients in the U.S. and around the world.

We believe that our ability to replicate this model of responsiveness to address whatever new challenges and questions arise in our clients’ industries has a meaningful impact on audit quality—for our individual clients and for the profession as a whole.

U.S. Tax Reform: A Lesson in Rapid Response

When Congress passed the U.S. Tax Cuts and Jobs Act in late 2017, businesses were looking for immediate insight into how the law would affect their operations, tax planning, and overall decision making and reporting. Our multidisciplinary leadership team of tax, accounting, financial reporting, and audit professionals immediately went to work analyzing the law and identifying issues clients would need to address both immediately and over the near term to comply with the law’s requirements and to take advantage of the opportunities resulting from its passage.

We then overlaid an industry lens, identifying specific issues and opportunities most relevant to each client’s industry and situation. Once we completed our initial analysis, our response team began identifying how the law would affect individual audit and tax engagements so those insights and adjustments could be incorporated immediately into any client engagements already underway.

Within days of the new law’s passage, our professionals were providing clients with focused advice on issues and questions specific to each organization. Going forward, in tandem with the anticipated release of over 1,500 pages of U.S. regulation related to the law, our response team will continue its work helping our clients navigate the myriad implications of these regulations.

"BDO provided outstanding service to our business both before and after the enactment of the Tax Cuts and Jobs Act of 2017. Beforehand they provided useful analyses of both the House and Senate bills enabling us to advise executive leadership of the impact of each. After the enactment, BDO provided a final analysis that facilitated accurate year-end 2017 tax accounting. And in 2018, BDO continues to advise us on emerging developments with regard to tax accounting and disclosures.”

TOM SISK
Director of Tax, Spartan Motors

Cybersecurity: Emerging Threats Demand Ongoing Diligence

Few issues today cause C-level executives and board members as much angst as cybersecurity threats. No industry is immune from these risks. That is why we are marshalling the full force of BDO’s intellectual capital to help our clients protect their data—and their stakeholders.

To help clients deal with current and emerging cybersecurity threats and manage their responsibilities for data protection, we maintain a multidisciplinary team that includes an audit partner leader who serves on the American Institute of Certified Public Accountants (AICPA) and the Center for Audit Quality (CAQ) Cybersecurity Working Groups. It is the goal of these groups to help both BDO and our clients understand cybersecurity issues and, more importantly, identify the resources necessary to mitigate risks, including updating and adapting internal controls to deal with these threats. Our auditors also work directly with leading cybersecurity professionals within the firm’s Advisory practice, including former FBI experts, to offer clients the latest tools, insights, and mitigation strategies around cyber risk.

Our professionals have spent the last several years working with the AICPA on its cybersecurity initiatives, including the development of its new cybersecurity examination engagement. Additionally, BDO was a key contributor in the development of the AICPA’s Cybersecurity Risk Management Framework. Our team regularly uses that framework to examine companies’ controls, protocols, and policies related to cybersecurity and to perform attestation engagements detailing the effectiveness of client cybersecurity risk management programs. Additionally, we further support the CAQ’s efforts in this area and contributed to the recently released CAQ Cybersecurity Risk Management Oversight: A Tool for Board Members.

Our work in Systems and Organization Controls for Cybersecurity (SOC for Cybersecurity) is an important outgrowth of our team’s efforts. This comprehensive examination service helps clients describe their risk management programs, assert that the controls implemented are suitably designed and operating effectively, and highlight the auditor’s attestation as to the fairness of the description and the suitability of the design and operating effectiveness of the controls.

Thanks to our team’s relentless vigilance in a field of rapidly emerging new threats, we continue to improve our effectiveness in developing and implementing cybersecurity controls gudiance, benchmarking the state of clients’ efforts against best practices, and auditing cybersecurity risk management programs.

Supporting Complexity

Audit relationships with our clients require a careful balancing act. For these relationships to work, both parties must bring the same level of commitment to ethics, learning, and knowledge, while also having similar approaches to reporting financial information. In this type of relationship, auditors learn from clients and vice versa as both parties share insight into new regulatory and reporting requirements, industry developments, and changes to the client’s business.

Our investments in client education and support are essential to the success of our client relationships. To help clients better understand the complexities of implementing emerging accounting requirements and implications of new business transactions, we have developed our Accounting & Reporting Advisory Services (ARAS) practice.

One area where ARAS has been particularly valuable is in helping clients manage the intricate new accounting standards for revenue recognition and lease accounting that are priorities for many corporate finance and accounting departments. ARAS also provides services to help under-resourced finance and accounting departments deal with the questions and analysis involved in major business transactions, which can include everything from business combinations and discontinued operations to debt modifications and stock compensation. Another critical element of ARAS is in providing support for ongoing reporting requirements, including those related to a company’s readiness for an initial public offering.

Shaping the Future of Audit

One of our most crucial responsibilities is to work with both the audit profession and our clients to shape the future of the audit. To that end, we are making investments in the form of personnel, time, technology, and resources to ensure BDO ideas and innovations play a leading role in that conversation. BDO partners and other experienced professionals are dedicating thousands of hours annually to this endeavor.

Enhancing the Audit Profession: Partners in Action

See how several BDO partners are at the forefront of the effort to continually enhance the audit profession’s ability to shape the audit of the future to best serve our stakeholders:

CHRISTOPHER TOWERNational Managing Partner, Audit Quality and Professional Practice / Orange County, CA
Named to serve on the Standing Advisory Group (SAG) of the Public Company Accounting Oversight Board (PCAOB), which advises the PCAOB on the development of auditing and related professional practice standards. Serves on both the CAQ Professional Practice Executive Committee and the CAQ Advisory Council.

BRIAN MILLERNational Partner, Audit Transformation & Innovation / San Francisco, CA
Member of the American Institute of Certified Public Accountants (AICPA) Audit Data Analytics working group and author of portions of the AICPA Guide to Audit Data Analytics, Chair of the Rutgers AICPA Data Analytics Research (‘RADAR’) initiative focused on advanced integration of data analytics within the accounting profession and leader of BDO’s global Data Analytics Strategy, Standards & Programs initiative.

JEFF WARDNational Managing Partner of Third-Party Attestation Services / St. Louis, MO
Played a key role in developing the AICPA’s 2017 Cybersecurity Risk Management Framework used to examine companies’ controls, protocols, and policies related to cybersecurity and to perform attestation on the effectiveness of client cybersecurity risk management programs.

JAN HERRINGERNational Assurance Partner / Woodbridge, NJ
Member of the CAQ Task Force on Auditor Reporting focused on the new PCAOB auditing standard that expands the auditor’s report and requires auditors to identify critical audit matters (CAM) and describe how these matters were handled in the audit. Member of the Auditing Standards Board of the AICPA and is further serving as President of the New York State Society of CPAs.

Raising the Knowledge Bar

We believe having a client base that values continuing education is an important factor to ensuring overall audit quality. Thus, we continue to amass significant client-centric educational offerings focused on issues that matter and add incremental value to our service. Thanks to the BDO Center for Corporate Governance and Financial Reporting, the marketplace has a convenient way to keep up with the latest thinking on issues relevant not only to audit, finance, and accounting executives but also corporate board and audit committee members.

The Center offers complimentary access to real-time education with continuing professional education (CPE) credits through access to live webinars and in-person local forums, along with self-directed learning through self-study coursework, publications, practice aids, and tools. This information covers important emerging issues in corporate governance and trending topics in accounting and financial reporting that impact those charged with governance and their advisors.

The Center also provides in-depth analysis and best practices on issues that range from director diversity and on-boarding new directors to the pitfalls of boardroom involvement in capital formation and significant evolving standards on revenue recognition, lease, and financial instrument accounting. The Center also captures emerging areas like information governance under the European Union’s General Data Protection Regulation (GDPR) that recently went into effect, providing companies with real-time insight into risks it may or may not yet be contemplating.

"Board members and, in particular, audit committees need to remain sharp and educated on issues of importance to our stakeholders. BDO recognizes this and provides our board with direct access to its National technical experts, who make learning impactful for our directors and financial executives.”

MORTON ERLICH
Audit Committee Chair, Skechers USA Inc.

Social Sustainability Connection to Audit Quality

We believe that audit quality begins with a workplace that is conducive to the needs of our professionals and our clients and that instills a clear and consistent value system. We aim to always put people first, a core value deeply rooted in our firm. We have been recognized for our achievements and continue to work hard in caring for our people and our clients.

As important as creating an internal environment that is supportive of producing quality work, we believe in connecting with the external environments that have supported us for over 100 years. We therefore support a variety of local-office led initiatives that allow our professionals to give back through being socially conscious citizens in doing good deeds and supporting initiatives that sustain our communities.

Building a global organization that serves clients in a wide range of industries around the world.

What we are proud of

Top Entry Level Employers for 2018
CollegeGrad.com

Working Mother 100 Best
Working Mother magazine

When Work Works Award
When Work Works

World at Work, Work-Life Seal of Distinction
World at Work

IAB Network of the Year Award
International Accounting Bulletin

Vault Accounting 50; Top Internship Program
Vault Accounting

Best Places to Work For
National Association for Business Resources

Best and Brightest in Wellness
National Association for Business Resources

NAFE Top Company for Executive Women
National Association for Female Executives

"First-class auditing firms must have strong project management processes, the ability to leverage technology, a willingness to ask the right questions, and a focus on helping clients deal with risks and challenges that are uncovered by the audit results. But these core competencies are ‘table stakes.’ In today’s landscape, clients require and, indeed, demand something more from their auditors: innovation.”

BILL EISIG
Atlantic Region Manaing Partner and Chairman of the Board of Directors

Financial statement audits represent independent assurance that a company is fairly presenting its financial position, results of operations, and cashflows. It is an understatement to say that various stakeholders must be able to trust and rely on these audits. To help ensure that each audit fulfills this role, an auditor must understand and provide timely insight into the nuances of a client’s business and industry, financial reporting, and corporate governance. That is the nature of the audit.

In today’s rapid age of change, many boards of directors, audit committees, CEOs, and CFOs are rightfully concerned about the future of the audit. Their concerns focus on how well and how quickly their auditors can adapt auditing methodologies, resources, and practices to the changes affecting their own companies.

In nearly every industry, well-established companies and business models face a constant threat of disruption as the Internet of Things (IoT), robotics, and artificial intelligence create new possibilities and transform customer expectations. Data analytics is rapidly revealing new insights about how companies and their auditors can operate more efficiently and create more value in the examination and presentation of information. The rise of distributed ledger technology (blockchain) and digital currencies is revolutionizing how financial transactions are made and processed. Looming over all of these innovations are the serious and ongoing concerns companies face when it comes to the security of and controls over their data.

All of these changes are putting immense pressure on service providers, regulators, and others throughout the accounting and audit community. However, we view these forces of change as a tremendous opportunity to apply our quality-centric mindset in innovative, valuable ways on behalf of our clients.

Innovation and Transformation: People

Emphasizing the Mindset of Our Auditors
Beyond simply keeping up with the latest technological developments and trends that are shaping our clients’ businesses, BDO is analyzing the trajectory of where these forces are headed and positioning our approach to audit quality accordingly. This means proactively sharpening tools and techniques in response to the realities of the marketplace, regulation, and other factors. It also means designing and testing our tools and techniques to help ensure that they maintain audit consistency even in the face of rapid change.

Our greatest asset in delivering both audit innovation and consistency is our people. Effective auditors must develop and maintain the mindset of an evaluator and the ability to break down any conscious or unconscious bias in audit execution and decision making. To foster this mindset among all of our people, we have worked alongside respected professors Douglas Prawitt, William Tayler, and Steven Glover of Brigham Young University (BYU), to create a Professional Skepticism and Judgment Framework as the central part of our auditor toolkit and continuous education (Figure 1).

Figure 1. Professional Skepticism and Judgment Framework

"We are very pleased to have worked closely with BDO in developing this new framework. We are incorporating this professional skepticism and judgment framework as the basis for our continuing academic research and coursework at BYU. We are excited to see that the leadership demonstrated by BDO for new ideas and perspectives is making an impression on the next generation of auditors.”

DOUGLAS PRAWITT
Brigham Young University Professor
By guiding audit-related decision making and honing professional skepticism, this framework is designed to drive the audit behaviors necessary to provide consistent outcomes that are supported with well-reasoned evaluative judgment. The framework provides the structure through which auditors can apply their technical knowledge and business acumen with the appropriate mindset of an evaluator. It supports an iterative process of coaching, consulting, communicating, and documenting the core elements of the audit process. Just as importantly, it helps our people avoid the traps and biases that can affect audits.

"When we can commit to the mindset of an evaluator and execute professional skepticism in everything we do, we will exceed every expectation that the regulators, client boards, and our profession have of us and that we have of ourselves.”

PHILLIP AUSTIN
Managing Partner - Audit

Innovation and Transformation: Process and Technology

Our Professional Skepticism and Judgment Framework is just one element of BDO audit innovation. We are delivering tangible, meaningful improvements for our clients, their stakeholders, and the larger auditing community in several other prominent areas.

Driving Global Audit Consistency
Our National Assurance Office (National Assurance) has become a leader of our audit transformation and innovation endeavors and our efforts to strengthen collaboration with our network of colleagues throughout the world. To achieve this, we are equipping our people with powerful tools that focus on enhancing communication, connection, and the management of the many, often daily, interactions involved during audit engagements. The next generation of our Global Audit Process tool (APT)2 helps improve our ability to enhance scalable audit integration, including scaling how we evaluate and reach conclusions about a client’s internal controls. We also collaborated with Microsoft on a successful pilot of our BDOLexi Translation App, a working paper translation tool designed to help manage information in multiple languages during global audits.

Leveraging the Digital Revolution
Cloud-based software and other digital tools can significantly improve the efficiency with which clients manage all aspects of accounting and auditing functions. We are at the forefront of investing in and developing cloud-based tools and augmented intelligence designed to help companies manage changing accounting requirements. For example, BDO is a founding member of the ConsenSys Accounting Blockchain Coalition, a group dedicated to educating businesses and organizations on accounting matters relevant to digital assets and distributed ledger technology, including blockchain.

In response to the implementation of significant new accounting standards, we are leveraging CoStar’s Lease Manager solution through our Accounting Reporting & Advisory Services (ARAS) practice to allow clients to capture, analyze and classify leases, and satisfy compliance and reporting requirements under FASB ASC Topic 842, Leases. Last year, we launched BDODrive, an integrated solution with a unique combination of professional and technological resources for core accounting and financial management, and an exceptional range of business advisory services. Powered by Microsoft and Intuit, BDODrive leverages leading-edge, cloud technology and security to bring a new level of efficiency and standardized best practices to outsourced finance and accounting services.

Employing the Power of Data

The ability to capture, analyze, and generate actionable insights from data has become a “must have” critical skill for auditing firms. We continue to develop and incorporate analytics-driven audit techniques designed to close the gap between data management and decision making. Tools including BDOAdvantage can help audit engagements streamline the extraction and analysis of large data sets throughout the year. The resulting changes to data management and analysis not only yield potential cost efficiencies but also identify and effectively channel auditing procedures to key areas of risk.

Adding Value From the Client Perspective
While we are continually improving our internal processes and developing new tools to support our commitment to audit quality, we never lose sight of the fact that our relationship with each client is critical to an audit’s success.

Innovation isn’t limited to leveraging new technology or implementing new methodologies. True innovation also involves looking at clients’ challenges from new perspectives and identifying new ways to add value to a company and its stakeholders. We know that our clients are looking for a business advisor who can use the audit as an opportunity to uncover previously unknown or unrecognized risks and business issues, particularly as our clients move into new markets and pursue emerging opportunities.

Thus, communications with our clients have taken on new meaning. We have extended capabilities for our Client Portal App through which clients can now more easily share information and interact with BDO audit teams in real time.

Through our subscription service on BDO.com, we are ensuring clients receive a steady stream of thought leadership and learning opportunities specific to their business.

At BDO, we are committing ourselves to continual innovation in the pursuit of audit quality, which has positioned us well to address our clients’ evolving needs.

At BDO, we believe that audit quality is the cornerstone of trust in financial reporting and financial markets.

Audit quality is a never-ending pursuit. As our clients’ businesses and industries evolve and the nature of the audit adjusts in response, BDO’s focus on audit quality and the commitments we make will never waver.

We share the following sections of our 2018 Audit Quality Report to underscore how we live each of these commitments every day.

]]>Mon, 25 Jun 2018 04:00:00 GMTeb90f5a3-2b13-4339-9f46-7a105eea6f21
Cash balance plans—also known as hybrid plans—are a type of defined benefit plan where employees see their accounts just like they would in a defined contribution plan. Unlike 401(k)s, however, employers—not employees—contribute to an account. These accounts are known as hypothetical accounts because cash balance plans are ongoing, not finite like a 401(k). Contributions to the accounts comprise two calculations: one that is based on a pay credit (which is typically based on a percentage of pay or a flat dollar amount) and the second is a fixed or variable rate interest credit.

Defined contribution plans are certainly eclipsing defined benefit plans in number and assets under management. But cash balance plans are bucking this larger trend. According to Kravitz’s 2017 National Cash Balance Research Report, the number of new cash balance plans increased 17 percent, while 401(k) plans grew only 3 percent in 2015, the most recent year for which data are available. In addition, cash balance makes up more than a third (34 percent) of all defined benefit plans. Most of this growth has come from smaller companies; Kravitz’s report shows that 92 percent of plans are found at companies with 100 or fewer employees.

Despite the growing popularity of cash balance plans, it’s important for companies to analyze whether they are a good candidate to adopt these strategies. BDO finds that cash balance plans work best in companies that have the following qualities:

Consistent cash flow and/or profit margins

Desire to give key employees the opportunity to accrue higher retirement savings than what would be expected with a 401(k) and/or profit sharing plan

Desire to take advantage of significant tax savings to help fund other plans

Reliable Annual Cash Flow

It’s important for a company that adopts a cash balance plan to have consistent cash flow because the plan sponsor is responsible for funding the plan annually. When investments do better than the guaranteed interest credit, the plan sponsor usually gets a reduced contribution rate. Conversely, if investments underperform, the plan sponsor has to make up the shortfall. In general, plan sponsors should expect to contribute between 5 percent and 7.5 percent of pay for staff employees for their retirement plan. In addition, companies generally should consider making a 3- to 5-year commitment to the cash balance plan before considering amending plan documents.

Key Retention and Funding Tool

Unlike many retirement plans today, cash balance plans are a powerful way to significantly boost retirement savings for key employees. This approach also creates considerable tax savings that can be used to fund other plans. In general, cash balance plans are typically used for top talent while a 401(k) or other type of defined contribution plan is offered to all employees.

Employees who are included in the cash balance plan are allowed significantly higher contribution rates. Each participant is allowed to accumulate up to around $2.5 to $3.0 million under current law; the actual contribution limit each year depends upon the participant’s age and progress toward accumulating that maximum amount. Beyond that, adding a cash balance plan can make a significant difference for key employees of all ages who are behind in saving for retirement, not just those who are age 50 or older, as is the case with 401(k) and profit sharing plans.

Listed below are the 2018 contribution limits allowed by the Internal Revenue Service for employees of various ages, along with the potential federal tax savings (assuming a 37 percent federal income tax rate for pass-through entities):

In many cases, the tax savings generated from employer contributions to a cash balance plan for key employees can help fund other retirement plans sponsored by the company. This is one of the primary benefits of the strategy and an important consideration. Assuming a 37 percent federal tax rate for pass-through entities, companies can realize tax savings ranging from $120,990 to $55,130 per employee for the age groups listed above. State and local tax savings may also apply. The tax savings alone from cash balance plans can easily pay for the employer contributions needed for 401(k) and profit sharing plans.

Another point to keep in mind is that IRS requires plan sponsors to retain an actuary to certify the funding of the plan. This can be done in-house or by a service provider.

Other Benefits

In addition to the tax savings and ability to provide significant retirement contributions to key employees, other benefits of cash balance plans include:

Portability. Like 401(k)s, most cash balance plans are set up to allow employees to take their vested assets should they decide to leave the company. Those assets can be rolled into an Individual Retirement Account (IRA) or other qualified retirement plan, such as a 401(k).

Flexibility. The plan sponsor can decide who to include in the plan as well as how much should be contributed to each hypothetical account. Of course, the plan needs to pass IRS non-discrimination testing rules, so employers need to cover a sufficient number of employees of the company and contribute at least 5 percent to 7.5 percent of pay for employees to achieve desired testing results.

Relatability. Most employees have a general understanding of how 401(k) plans work, and this base of understanding helps them grasp cash balance plans. Cash balance plans’ hypothetical accounts work quite similarly to 401(k) plans, so it’s usually not overly difficult for sponsors to gain buy-in from employees when introducing a cash balance plan.

Protection. Cash balance plans are qualified plans. That means that in a financially troubled business, the assets are protected from creditors.

BDO Insight: Cash Balance Plans Are Worth a Look

While most employers assume that 401(k) plans should be the primary retirement benefit they offer employees, cash balance plans can add significant value to a company as well. In the race to attract and retain top talent, cash balance plans can be an important tool. In addition, the tax savings realized by implementing cash balance plans can help fund other company retirement plans. Contact an ERISA Compensation and Benefits team member to learn more about whether cash balance plans are right for your organization.

In a recent speech given during a May auditing symposium, new PCAOB Chairman William Duhnke spoke of the transitions that he intends for the PCAOB, reflecting on the organization’s last fifteen years while seeking to define the vision, strategy and operational plans for its next five years.

PCAOB Leadership Changes and Transition Overview

Chairman Duhnke was sworn in as PCAOB Chairman in January 2018. His appointment was followed by a complete replacement of the PCAOB board to include: Kathleen Hamm, J. Robert Brown, James Kaiser and Duane DesParte. As he indicates in his speech to participants of the 2018 Deloitte and University of Kansas Auditing Symposium, the PCAOB has assembled a “diverse set of talented and dedicated individuals,” each of whom “bring a wealth of relevant experience and skills to the board.” Their backgrounds encompass financial reporting, investor-relations, public company, auditing, academia, and board of director experience. Additional significant PCAOB leadership changes include the departures of Helen Munter, Director of Registration and Inspections, Martin Baumann, Chief Auditor and Director of Professional Standards, Claudius Modesti, Director of Enforcement and Investigations, and Nirav Kapadia, Director of the Office of Information Technology and Chief Information Officer. To date, their replacements have not yet been named.

Chairman Duhnke indicates that “with such a significant change in the Board's composition, comes a significant opportunity — a chance to reflect on lessons learned, to innovate, and ultimately to improve how we approach our oversight of the auditing profession in an increasingly dynamic environment.” In the PCAOB’s 2017 Annual Report, the Chairman’s letter promises that “2018 necessarily will be a year of transition for the PCAOB” and the board will “use this as an opportunity to review all aspects of the PCAOB’s activities.” In his recent Baruch speech, Duhnke distinguishes between the operational activities of the PCAOB and points toward the focus on the strategic planning process for the future.

Strategic Planning Process

Since 2007, the PCAOB has drafted a strategic plan with a five year outlook created from inward reflection by leaders within the PCAOB. While acknowledging the advances the PCAOB has made with respect to audit quality, Duhnke outlines the opportunity the current board is taking to view things from a broader perspective. Firstly, an external survey was hosted this spring by an outside consultant to solicit input and feedback from constituents in the market to help shape the strategic priorities of the PCAOB. Participants included investors, management, audit committee members and directors, academics, foreign audit regulators, and auditors. Secondly, the PCAOB has hosted one-on-one facilitated interviews of constituents similar to those who participated in the survey. Thirdly, an internal outreach was performed that gathered insights from the entire PCAOB organization.

The board is currently studying the “fruits of these efforts as we define our key priorities for the coming years.” Chairman Duhnke indicates that key performance measures will likely emerge by which the PCAOB can judge its progress against its strategic plan. The plan is expected to be drafted by the end of July for public comment with a final plan expected to be announced in November with their annual 2019 budget.

Core Values

As part of the transition process, Duhnke has highlighted five preliminary core values that the PCAOB is to embrace:

Integrity – adherence to the highest standards of ethical and professional conduct

The core values are intended to serve as key principles to guide collective PCAOB action and decision-making.

Organizational Assessment

The PCAOB is conducting a comprehensive assessment of itself as an organization to institutionalize a culture of self-examination. Several conclusions have already been reached and include: (1) the need for a fresh look at operational and program designs; and (2) improvements to policy-making and external engagement. Throughout the speech, Duhnke outlines areas for further reflection which is intended to provide insight to a new path forward under his leadership.

Inspections Process
Chairman Duhnke raises the point that many audit firms have “plateaued” with respect to improving their inspection results and the PCAOB will be looking deeper into the potential reasons as to why this is occurring, including assessing the effectiveness of its current inspection approach. Questions to be asked center around: integrating economic and risk analysis; leveraging collected data; sharing insights with audit committees, audit firms and investors; calibrating inspections to focus on quality control systems to prevent (vs. detect) deficiencies; considering performing more random selections (vs. risk-based) and changing the number of inspections based upon an audit firm’s past performance; revising timing/frequency of inspections; providing additional inspection guidance; and emphasizing cost/benefit analysis.

Additionally, the PCAOB is taking a closer look at its reporting on inspection findings with questions centered on: whether current reporting is meeting the needs of constituents; what additional value-added information may be necessary; means to communicate nature and severity of findings; etc.

As part of this analysis, the PCAOB is also considering other ideas, including what other global regulators are doing and is intent on collaborating in this area. In his speech, Duhnke highlights British and Dutch inspection approaches. The UK Financial Reporting Council (FRC) performs both firm-specific sample audit and firm quality control inspections as well as thematic reviews that consider firm policies, procedures and practices illuminating best practices to be shared with the public. The Dutch Authority for Financial Markets’ (AFM) approach uses dashboard reporting of the largest firms around a thematic review of audit firms’ control, behavior and culture, and internal supervision to track progress in meeting expectations.

Oversight Programs
The PCAOB is looking beyond its inspections process to consider further enhancements to the following oversight activities:

Next Steps

We are encouraged by Chairman Duhnke’s vision and look forward to the PCAOB’s further engagement with the profession, investors, academics, management and audit committees in the future. BDO will continue to monitor and highlight activities of the PCAOB and work with them to promote audit quality for our clients and our profession. Look for further information on these topics along with other financial reporting and governance activities, trends, and discussion points for our client audit committees and management teams through our Center for Corporate Governance and Financial Reporting.

For more information, please contact one of the following practice leaders:

A NOTE FROM BDO’S NATIONAL ERISA PRACTICE LEADER

Our team recently launched BDO’s new ERISA Center of Excellence. Through this platform, dedicated ERISA professionals share their thoughts around the latest insights on regulations and industry trends. The long-running quarterly publication, EBP Commentator, will no longer be published, rather insights will be published on the ERISA Center of Excellence in real-time and later captured in our new publication, ERISA Roundup.

Top of mind as we move in to Q2 and the beginning of employee benefit plan audit season, is audit quality. At the heart of BDO’s approach to audit quality sit our core values – People First, Empowerment Through Knowledge, Exceptional Every Day Every Way, Embrace Change, and Choose Accountability. BDO’s Chief People Officer, Catherine Moy, said it best: “Audit quality is improved when we bring together the best people who can effectively collaborate.” The collaboration of our dedicated specialists across the entire ERISA spectrum, from audit and tax professionals, to plan consultants and actuaries, brings meaningful insights and technical knowledge to our clients.

We look forward to helping you and your employee benefit plans achieve more in 2018 and beyond. Please don’t hesitate to reach out if you have any questions or if we can be of service.

Roth 401(K), Worth a Fresh Look?

This year marks the 20th anniversary of the Roth Individual Retirement Account (IRA). While the Roth IRA has been widely hailed as a powerful retirement saving vehicle because of its tax-free-growth and has seen widespread adoption by individuals who meet the income requirements, the Roth 401(k) isn’t nearly as popular.

That status, however, may change. The recent tax reform law poses an opportunity for employers to take another look at the Roth 401(k).

Mitigating Healthcare Costs with HDHPs and HSAs: What Plan Sponsors Need to Know

It’s no secret that healthcare is expensive—and costs are likely to continue going up. While preferred provider organizations (PPOs) are still the most popular plan type, many companies are turning to consumer-directed, high-deductible health plans (HDHP) to help manage costs and are adding reimbursement accounts like health savings accounts (HSA) to help employees pay for expenses.

One of the biggest challenges employers face is figuring out how to develop a financial wellbeing plan that is tailored to the needs of their employees. Given the range of financial needs—both across generations and within them—a one-size-fits-all financial wellbeing plan likely won’t be sufficient.

Our team recently returned from the AICPA Employee Benefit Plans Conference.

Kimberly Flett, Compensation and Benefits Services Managing Director, led a half-day workshop on Form 5500s and presented on plan distributions.

Jeff Ward, Third-Party Attestation Practice Leader, and Lara Stanton, Assurance Director, presented on Cybersecurity for Employee Benefit Plans. Lara also led a deep dive session on the use of SOC-1 reports for Emplyee Benefit Plans.

ERISA Center of Excellence

BDO’s ERISA Center of Excellence is your source for insights on emerging regulations, industry trends, current topics, and more. Visit us at www.bdo.com/erisa or follow along on Twitter: @BDO_ USA and #BDOERISA. CONTACT:

]]>Mon, 04 Jun 2018 04:00:00 GMT76790fff-1fbc-413e-a6a4-c1333dddf708A new tool issued by the Center for Audit Quality aims to assist board members in their oversight of data security and cybersecurity risks and disclosures by providing key questions board members can use in their discussions with management and auditors. The tool further provides key resources from leaders in the area of cybersecurity. The goal of this Tool is two-fold. First, it is intended to better educate board members and others charged with governance and provide discussion starters for them to properly evaluate their cyber risks. Second, it is meant to be a tool for auditors to help them assess how actively involved the board members and others charged with governance are in assessing these risks.

Overview

This spring, the Center for Audit Quality (CAQ) released a new tool, Cybersecurity Risk Management Oversight: A Tool for Board Members, as a resource for board members in their oversight of data and cybersecurity risk.
The tool provides resources and key questions board members can use in their discussions with management and auditors organized into four sections:

Understanding the role of management and responsibilities of the financial statement auditor related to cybersecurity disclosures

Understanding management’s approach to cybersecurity risk management

Understanding how CPA firms can assist boards of directors in their oversight of cybersecurity risk management

Cybersecurity has rapidly become a significant risk to businesses as breaches of information continue to result in financial and reputational damage, diminish investor confidence, and expose organizations to potential regulatory fines. It is important for board members to recognize and address cybersecurity risk. One key element is to ask open-ended questions of management and auditors, each of whom have valuable and varying perspectives that may benefit those charged with governance. The board may further determine that an outside advisor is required in evaluating the company’s mitigation of cybersecurity risk. The CAQ Tool has provided suggested questions to assist in these conversations.

Understanding how the financial statement auditor considers cybersecurity risk
The CAQ recognizes that “the financial statement auditor considers cybersecurity in two key contexts: (1) the audits of financial statements and, if applicable, ICFR; and (2) financial statement other disclosures.”
It is the responsibility of the audit committee to approve audit and non-audit services as well as understand the overall audit strategy. Auditors may be engaged for financial statement audits, financial statement audits that include reviews of ICFR, or in an advisory role outside of the audit of financial statements. It is important that the board fully understands the scope of work to be performed by the auditor and how cybersecurity is considered within this context by asking open ended questions resulting in productive discussion. The board should continue to have an open dialogue with auditors to understand roles and responsibilities related to cybersecurity risk.

Understanding the role of management and responsibilities of the financial statement auditor related to cybersecurity disclosures
The release of The SEC Commission Statement and Guidance on Public Company Cybersecurity Disclosures reinforces the focus on and demand for transparent and complete information regarding cybersecurity risk in all SEC filings including annual and periodic filings (e.g., Form 10-Q). These recommendations are applicable to nonissuers as well. While stakeholders must understand it is impossible to address all cyber risks in a company’s filings, the expectation is that known risks, policies and procedures, incidents, and programs should be communicated. Companies are charged with telling their own cyber risk story and in order to properly oversee this component, the board must understand broadly the risks and mitigating factors, together with the responsibilities and expertise of all the resources at their disposal.

Understanding management’s approach to cybersecurity risk management
As the “Internet of Things” (IoT) quickly becomes a reality, and cyber risk evolves to include all aspects of a company’s operations, it has become increasingly necessary for management to develop a comprehensive cybersecurity risk management program. Often companies have cybersecurity integrated throughout their enterprise risk management. It is the board’s responsibility to oversee these programs and ensure transparent disclosure to stakeholders.

Understanding how CPA firms can assist boards of directors in their oversight of cybersecurity risk management
CPA firms are in an advantageous position to support boards in their oversight of cybersecurity. These firms bring core skills such as skepticism and innovation, values such as independence and objectivity, and experience from a broad range of clients and knowledge - most firms even have teams specializing in cybersecurity. It is important to understand independence considerations in addition to the potential service offerings.

Next StepsThe CAQ Cybersecurity Risk Management Oversight: A Tool for Board Members serves as a valuable resource to board members in the execution of their oversight duties with respect to increasing transparency, consistency and reliability within the financial reporting chain. It further should be referenced by auditors as they strive to provide guidance to audit committees in this critical risk management area.

We commend the CAQ for continuing to produce valuable tools and resources on this topic and others relevant to boards of directors. We will continue to highlight these and other activities, trends, and relevant discussions points to our client audit committees and management teams through our Center for Corporate Governance and Financial Reporting.
For more information, please contact one of the following practice leaders:

]]>Fri, 01 Jun 2018 04:00:00 GMT56b94f3f-2699-4994-a5a3-83f3c45f6b94General Data Protection Regulation (GDPR) goes into effect May 25, and its impact reaches across the pond to many U.S.-based businesses that collect, use or store data from EU residents.

Many U.S.-based companies are still trying to figure out whether the regulation applies to their organization. More than half (52 percent) of 400 U.S.-based companies surveyed by The Computing Technology Industry Association in April of this year reported that they are still exploring the applicability of GDPR to their businesses, have determined that it is not a requirement for them, or are unsure. Of the remaining businesses, only about one-in-four (27%) said that they are fully compliant – and that was just one month shy of the deadline.

Although the rule does not directly address 401(k) or other benefit plans, it should be of particular interest to plan sponsors because of the personal information that their organizations and service providers possess for each participant. Even U.S. companies that do not have any EU employees or clients, and do not market to EU residents, may still want to consider following GDPR guidelines because many experts believe that the regulation will eventually become the standard for data privacy across the globe.

Here, we will explain the main points of GDPR and what it means for benefit plans.

What is GDPR?

The EU passed GDPR in April 2016 and the rule is effective as of May 25, 2018. It updates and unifies the 28 implementations from the 1995 Data Protection Directive and gives EU citizens unified and broad control over their personal data and information. It sets new, stricter standards of accountability for companies that collect, process and use data gathered from EU citizens. There are also strict breach notification and data documentation requirements. In addition, EU citizens can ask an organization how their personal information is used, stored, protected, and transferred.

Do U.S. Companies Need To Pay Attention?

It depends. GDPR applies to every organization that houses personal data of, provides products or services to, or markets to, EU residents. Companies do not necessarily need to have a physical presence in the EU; if they have EU resident data, the rule applies. For example, if a U.S.-based plan sponsor has employees who are EU citizens living in the U.S., GDPR applies to that company. If a company collects information from EU citizens via their website, GDPR applies to that company.

Additionally, companies will now be responsible for showing that they are complying with the regulation—or face severe penalties. For instance, certain organizations that do not report a data breach within 72 hours of discovery can face the maximum fine of up to 4 percent of their global annual revenue or €20 million, whichever is greater. GDPR can also force an organization in violation of its rules to stop collecting personal data. There are many factors that will impact the level of penalty.

What Is Considered Data Under The Rule?

The definition of data under GDPR is rather broad. The regulation says “personal data” means any information relating to an identified or identifiable natural person. That means any kind of information that can identify a person either directly or indirectly. This includes email addresses; pictures on Facebook or other social media websites; browser cookies; human resource information that connects names to job titles; and internet searches and other online activity that can be traced back to the user are all considered personal data.

Benefit providers or plan sponsors need to understand what data they have and how it is used by the organization so it can be identified, monitored and protected. Further, organizations will need processes in place to respond to data subject access requests, such as the right to be forgotten.

It is important for plan sponsors to understand that GDPR requirements extend beyond data stored at their companies; GDPR requirements cover data collected and stored by an organization’s service providers, as well as any sub-contractors. Organizations need to determine the types of personal data they store, where it resides, who can access it, and what it’s being used to do. Recordkeepers, plan attorneys, consultants, payroll companies, and third-party administrators are the types of service providers who may have access to personal data. The organizations engaging these service providers have obligations under GDPR and should be thinking about how to structure or amend contracts to address standards for data collection, storage and usage.

What Are Individuals’ Rights Under GDPR?

One of the main tenets of GDPR is that EU residents have certain rights related to their personal data. Companies must ascertain an individual’s consent to use their data. In addition, companies must inform individuals, in clear and plain language, of their rights to their personal information, including the right to know what of their data the organization is storing, why the organization is storing it, and the right to be notified of a breach. Under Article 17, individuals have the right to request to be forgotten (deleted) from an organization’s records and systems.

BDO Insight: Data Protection Is a Core Competency

Successful businesses must constantly respond to new threats, and in today’s environment, cyberattacks and data breaches have emerged as a high priority for businesses of all sizes. While GDPR has raised the stakes and codified the requirements for data handling and protection for many companies, it is simply the next step in what will be an evolving journey for companies and regulators.

Regardless of whether GDPR applies directly, plan sponsors have a fiduciary responsibility to act in the best interests of their plan participants. In addition to creating significant legal liability to plan sponsors, data breaches can pose a major threat to participants’ financial well-being and peace of mind. Conducting careful reviews of procedures used by the company or its providers to collect, store and use personal data should be an essential part of a company’s retirement plan and benefits offering.

Building data privacy considerations into business functions is a competency that organizations must develop and continually strengthen. Your BDO representative can help you assess your current practices and implement a global plan to address data protection requirements.

How Can BDO Help?

Most companies that conduct business with EU residents, have EU resident employees, or market to EU residents require a GDPR action plan. GDPR readiness is not a one-time event; it necessitates an ongoing strategy to identify, monitor and protect personal information and to design systems and processes with data privacy in mind. No matter where your organization is on its road to GDPR compliance, BDO can help.

]]>Tue, 29 May 2018 04:00:00 GMTdbd94bcc-3e60-4f28-8e21-0c5206365463
Nearly 60 percent of plan sponsors automatically enroll workers in their defined contribution plans today, according to the Plan Sponsor Council of America’s 60th Annual Survey of Profit Sharing and 401(k) Plans. That’s nearly double the amount from a decade ago, and up from 46 percent in 2011. More than 73 percent of plans with automatic enrollment also automatically increase deferral rates, an increase of more than 18 percentage points over the past 10 years. PSCA also reports that 89 percent of eligible workers participate in a company defined contribution plan.

Despite the growing popularity of automatic enrollment and escalation features, determining whether to adopt them is far from being a decision that plan sponsors can put on cruise control. While automatic enrollment and escalation offer many benefits to employees as well as plan sponsors, sponsors need to consider and manage them effectively to ensure a successful program.

Background and Latest Data on Automatic Enrollment

The Pension Protection Act of 2006 (PPA) created a safe harbor for plan sponsors to automatically enroll workers into 401(k) plans. Instead of requiring employees to choose to join a plan, automatic enrollment flips the decision to start saving and requires them to opt-out if they don’t want to participate. With automatic enrollment, employers elect a default contribution rate and can use a Qualified Default Investment Alternative (QDIA), such as a target date or lifestyle fund, to relieve employers of any fiduciary liability for this initial investment choice. The PPA also allows plan sponsors to automatically increase employee contributions over time. Once in the plan, participants can reallocate the assets out of the QDIA to whatever investments they see fit within the plan’s eligible investment options.

The PPA has paved the way for workers’ inertia to work for them, not against them, when saving for retirement. Studies have shown that automatically enrolling workers into defined contribution plans and boosting their contribution rates on an annual basis has helped more people to save for retirement than if left on their own to do the work. In addition, Wells Fargo Institutional Retirement and Trust’s 2017 Driving Plan Health study showed that there is little difference in opt-outs when deferral rates are set at 3 percent versus a higher 6 percent contribution rate.

Automatic enrollment is most common in large plans (i.e., plans that have 5,000 or more employees); 70 percent of large plans use automatic enrollment. Industry-wise, 84 percent of insurance and real estate companies use the strategy, followed by non-durable goods manufacturing at 82 percent. Industries with lower usage rates include utility and energy companies (39 percent) and service businesses (46 percent).

So why are nearly 40 percent of plans not following suit and using automatic enrollment? And why are t nearly a quarter of companies currently using auto enrollment not pairing it with annual contribution escalations? For those not using auto enrollment, nearly half of the respondents to the PSCA survey said they were happy with their participation rates while a third said auto features don’t line up with corporate thinking.

Understanding the Benefits

As with any element of plan design, there are important items to consider when - using automatic enrollment and escalation. Various types of automatic contribution arrangements can meet safe harbor provisions and exempt plans from certain non-discrimination testing requirements. Even though auto features are increasing in popularity, there is not a one-size-fits all program for every retirement plan. As companies consider whether to adopt these features—or amend their use of them—they need to evaluate the potential benefits and costs from both the employees’ perspective and the company’s perspective.

Benefits of Automatic Enrollment and Escalation

For Plan Sponsors:

Defaults employees into an investment vehicle that is pre-approved by the Department of Labor

May streamline and simplify the new employee on-boarding process

May lead to lower administrative fees and/or the ability to offer additional tools and services to participants thanks to higher cumulative assets under management

Puts employees on an automatic savings track, which may help improve employee retention and help them feel more secure about their financial futures

Reduces employer payroll taxes because funds are being contributed pre-tax

Generates certain tax credits and deductions, such as matching contributions, for employers

For Employees:

Increases plan participation among all incomes and age groups

Allows many participants to save for retirement who might not do so if left on their own

For traditional plans, participants defer paying income tax until they withdraw funds at retirement

Allows participants to take advantage of company match or “free money”

Necessary Considerations for a Successful Automatic Enrollment and Escalation Program

For Plan Sponsors:

Requires administrative oversight, particularly in regard to ensuring all eligible participants are properly and timely enrolled and escalation amounts are properly aligned with payroll withholdings

Requires coordination and controls with record keepers and other third-party service providers

Requires amending plan documents

Certain auto enrollment plans need to start at the beginning of the plan year

May call for more robust communication campaigns with employees to help them understand new plan features

If mistakes are made, corrective measures can be costly and time consuming

May cause employer contribution amounts to rise as more employees participate in the plan

May result in more accounts with lower balances, especially for plans with lower default contribution rates and adds more burden on administrator to clean out balances when participants terminate

For Employees:

May give employees a false sense of security, especially if the default rate is set too low and no automatic escalation is paired with the enrollment

May increase the risk that employees end up with suboptimal asset allocations across their entire portfolios if they don’t fully understand the holdings in their target date or lifecycle funds

BDO Insight: Consider Leveraging the Power of Automation to Improve Financial Wellness
As Americans’ retirement savings rates continue to be lackluster and as companies become increasingly focused on their employees’ financial wellness, automatic enrollment and escalation features may be useful tools in managing your workforce and getting employees prepared for their financial futures. In addition to helping put employees on track for a successful retirement, implementing these features can have powerful benefits for employers, as well, by streamlining the enrollment process and serving as a tool to attract and retain talented workers.

Before adopting automatic enrollment or escalation, plan sponsors should work closely with their internal teams, as well as with their third-party service providers, to ensure that the proper controls and procedures will be put in place.

To better understand the benefits and administrative requirements of automatic enrollment and escalation and to assess how these features could be adopted in your plan, contact a member of BDO’s ERISA team.

Summary

In a recent speech offered to a broad group of stakeholders, SEC Chief Accountant Wes Bricker emphasized the advancement of financial reporting quality as a foundation that “underpins the efficient functioning of our capital markets and economy.” BDO encourages audit committees, preparers, investors, academics, standard-setters, and auditors to review and reflect on common interests we all share.

Details

Overview – Working Together to Advance Financial Reporting
As highlighted in prior speeches and now specifically emphasized in his current May 2018 Baruch College Financial Reporting Conference speech, SEC Chief Accountant Wes Bricker continues to direct focus on high quality financial reporting and its function in helping promote capital markets. Reliable financial information and good governance, provided by companies and reinforced by independent auditors, are enablers for sound decision-making by individual and institutional investors.

Key PointsGeneral vs. Special Purpose Financial Statements
Chief Accountant Bricker notes both a reminder and a distinction between general and special purpose financial statements. General purpose statements are prepared in accordance with GAAP, which is developed through standard-setting that avoids providing “privilege to certain objectives, economic activities, financial products, or market participants” that could negatively impact “confidence in the accuracy or quality of reported information [and] impair capital formation…” Special purpose financial statements (e.g., cash, tax, regulatory, contract, or other basis of accounting) are generally used when U.S. GAAP financial statements are not required and information provided is intended for use by a limited set of users. Bricker encourages the support of standard setters through participation and feedback from users and preparers during the standard setting process and additionally through timely implementation and quality application of standards by financial statement preparers.

New Accounting Standards, Non-GAAP, and Other Developments
Chief Accountant Bricker also points at the evolution of standard setting as exemplified through the significant implementation requirements of “new GAAP” standards for revenue recognition, lease accounting, and credit losses in the current and ensuing years. Stakeholders are reminded to continue their focus on successful implementation for each of these standards.

U.S. Tax Reform is another area that requires active attention by companies to complete accounting necessitated by the new legislation and provide investors with insight through disclosures described in SAB 118 about the status of the company’s accounting for the effect of income tax reform during the measurement period.

Bricker’s remarks further highlight changes in accounting and disclosures effective this year regarding stock held in other companies (FASB ASC Topic 825-10) whereby changes in fair value from one period to the next will be recognized in net income and investors will be better able to see the impact of management decisions to buy, sell or hold equity investments. He reminds companies who use non-GAAP measures to provide supplemental information within the financial statements that non-GAAP is just that: supplemental, rather than a substitute for GAAP. Audit committees, in particular, play a key role in overseeing the appropriate use of non-GAAP measures by management and are encouraged to take the time to “review the metrics to understand how management evaluates performance, whether the metrics are consistently prepared and presented from period to period, and the related disclosure policies.”

Other Significant Areas to Positively Effect Quality of Disclosures
Companies are encouraged to consider exposure to changes in economic and market conditions – e.g., liquidity, changes in market prices and rates, etc. – that impact market risk disclosures to investors.
Auditor independence is also on the Chief Accountant’s radar as a means for ensuring the objectivity and integrity of a company’s financial reporting. The SEC has proposed for comment “loan provision” rulemaking that will make practical changes to compliance to more accurately identify lending relationships with equity owners of audit clients that may impair an auditor’s independence. Feedback on this is encouraged by the SEC.

Role of Audit Firm Governance and Culture
With recent headlines of alleged accounting firms’ misconduct, Chief Accountant Bricker shines a light on the importance of audit firms’ governance and culture in ensuring trust in the financial reporting chain. Audit firms, like corporations, must maintain an effective firm-wide (enterprise) risk management system. This should be coupled with a strong commitment to quality control standards along with sound governance and reporting practices.

Similarly, ensuring independence and diverse thinking among boards of directors and audit committees are viewed by Bricker as enhancements to good governance that can continue to be made to both public and private company boards.

Good governance is intertwined with tone and culture that should permeate both companies and audit firms, alike. For auditing firms, Chief Bricker points out that “audit quality and value can be more difficult for firm leaders to integrate into regular processes unless the firm as a whole—top to bottom and across service lines and geographies—views the mandate for audit quality and value as key to its success.” The more complex audit firms are appointing or considering the appointment of independent directors or advisors to their own boards. The largest audit firms also produce voluntary audit quality reports to share publicly how they are operating their business in the pursuit of audit quality for their clients and the marketplace. BDO’s 2017 Approach to Audit Quality is available here and we are poised to release our 2018 Audit Quality Report in June 2018.

Next Steps
We appreciate and agree with Chief Bricker’s comments and observations. BDO will continue to highlight this information along with other financial reporting and governance activities, trends, and discussion points for our client audit committees and management teams through our Center for Corporate Governance and Financial Reporting.
For more information, please contact one of the following practice leaders:

]]>Thu, 24 May 2018 04:00:00 GMTc90b9fb9-89ee-4cb0-b40d-a0d48482d8a9
The Tax Cuts and Jobs Act (the Tax Act), passed in December 2017, implemented a flat corporate tax rate of 21 percent, shifting from a tiered system in which the top marginal rate for corporations was 35 percent. Even though the Tax Act also eliminated some common deductions for businesses, most corporations will face a lower effective tax rate in 2017 than in 2018. For these companies, accelerating deductions into 2017 could result in significant tax savings.

One of the more powerful opportunities to do this has to do with contributions to qualified retirement plans. A for-profit business with a December 31, 2017 tax year end and an extended income tax return can deduct contributions to its qualified retirement plan if they are made before September 15, 2018. The 14 percentage-point difference between 2017’s top rate of 35 percent and 2018’s rate of 21 percent can create significant savings for qualified retirement plan sponsors who act before the September extended deadline.

This accelerated funding technique is especially attractive for sponsors of defined benefit plans because the funding does not have a direct impact on the amounts of benefits owed or paid under the plan. Pre-funding of a defined benefit plan simply increased the cash set aside in the pension trust to meet the plan’s future benefit obligation. It does, of course, put the cash out of reach of the business and its creditors which is a consideration when projecting the business cash flow requirement. The higher funding levels can lower variable-rate premiums owed to the Pension Benefit Guaranty Corp. (PBGC), increase the plan’s projected assets, and lower future funding requirements. This approach also makes de-risking strategies more viable.

Do The Math
Accelerating defined benefit plan contributions to the 2017 plan year can create a positive ripple effect. For example, Company A in the top corporate marginal tax bracket decides to contribute an extra $1 million to its pension plan for the 2017 plan year rather than wait to make that contribution for the 2018 plan year. As a result, the company will receive an additional $140,000 in tax savings because it’s able to deduct the contribution at the 35 percent rate instead of the 2018 rate of 21 percent.

Meanwhile, the PBGC—the government’s insurance agency for defined benefit plans—charges two different kinds of premiums: a flat rate and a variable rate. The flat-rate premium for single employer plans is based on the number of participants in the plan. The 2017 rate is $69 per participant; it will go up to $74 in 2018. It’s an annual charge, so plan sponsors simply pay this. There’s no real savings in this premium, except in the case of a company that de-risks using an annuitization or lump-sum strategy, which would leave it with fewer participants in the plan.

The variable rate is set at a certain percentage for each $1,000 of unfunded vested benefits (UVBs). In 2017, plan sponsors pay 3.4 percent, or $34 per $1,000, in UVBs; this is capped at $517 per participant. The rate will go to 3.8 percent in 2018, or $38 per $1,000, in UVBs, with a cap of $523 per participant. The PBGC estimates the cost will go to $42 per $1,000 in UVBs in 2019.

Clearly, a better-funded plan will pay a lower variable rate premium. The bonus is that extra contributions will not only lower the UVB for 2017, but they will be invested and could be expected to compound in the future. Higher overall earnings can reduce prospective funding obligations.

Another potential benefit from the new law: the mandatory tax on overseas foreign earnings was lowered from 35 percent to 15.5 percent. The extra cash companies will see as a result could go directly toward many corporate objectives, including improving pension funding levels.

Before jumping to take advantage of these potential benefits, though, it’s important to work with your BDO expert to make sure overfunding doesn’t occur. While excess assets can go back to an employer when the plan terminates and all benefits are paid out, such asset reversions are subject to regular taxes and hefty penalties.

Time to De-Risk?
The financial crisis of 2008 delivered a heavy blow to defined benefit plan funding levels. As a result, many companies decided to implement various de-risking strategies. Some changed the asset management approach, but others chose to reduce plan obligations by purchasing annuities or offering lump sum amounts for plan participants. With the latter two actions, plans became smaller, but more manageable in terms of ongoing costs.

Ten years later, plan sponsors have a similar opportunity to de-risk again. Plan sponsors wanting to get off the rollercoaster when dealing with liabilities, variable premiums, investment returns, interest rate assumptions, regulations, and other moving targets that deeply impact a pension plan’s bottom line, might consider the various options available to reduce or eliminate risk in a company’s defined benefit plan.

BDO Insight: Consider Taking Advantage of a Rare Opportunity

While the Tax Cuts and Jobs Act didn’t directly address defined benefit plans, the law’s shift in the corporate tax rate, as well as the tax rate for unrepatriated foreign earnings, has presented plan sponsors unique opportunities to boost plan funding levels. Plan sponsors should work with their BDO expert to set goals, understand risks and benefits, determine the best funding strategy, as well as to see how this strategy integrates with other employer offerings.

There are many factors to consider. While the September 15 extended deadline is still months away, it will get here sooner than you think. Much thought and planning should go into a well-executed defined benefit funding plan, so please take the time to work with your BDO advisor to weigh the possible benefits for your company.

]]>Thu, 17 May 2018 04:00:00 GMT4f370fd7-e09b-4549-a66d-44333802451aDon’t miss BDO’s dynamic resources for board of directors and financial executives, subscribe today.
BDO’s Center for Corporate Governance and Financial Reporting provides numerous resources, webinars and live events designed to help board of directors and C-Suite executives stay on top of emerging issues and hot topics affecting both public and private companies. For a closer look view our infographic below and subscribe today!

"The myriad of issues faced by smaller businesses today are daunting. BDO's ongoing efforts to actively educate, inform and engage, at multiple levels and through various vehicles, greatly assists our board in meeting challenges, and in turn, helps drive long term value for our shareholders" - BERNARD C. BAILEY, PHD CHAIRMAN AND CEO, AUTHENTIX

]]>Thu, 17 May 2018 04:00:00 GMT354f8842-4aca-4c19-93be-50df750c6c3b
According to a recent Merrill Lynch study, Women and Financial Wellness: Beyond the Bottom Line, women may make $1 million less than men by the time they reach retirement. This disparity has many causes. Women are much more likely than men to experience multiple work interruptions to take care of children, parents and spouses. Combining this with lower pay, part-time or freelance jobs with little to no access to retirement savings plans, longer lifespans, and health care needs, a bleak financial retirement picture for women emerges.

Furthermore, women’s attitudes and priorities may add additional obstacles to financial well-being. The 18th Annual Transamerica Retirement Survey of American Workers showed that only 12 percent of women are very confident they will retire comfortably, compared to 24 percent of men. Only 51 percent of women say that saving for is a priority, compared to 62 percent of men, according to the survey.

The good news is that women and men want help from their employers to improve their financial well-being. Mercer’s Healthy, Wealthy and Work-Wise study showed that 79 percent of Americans trust their employer to give sound financial retirement assistance. In addition, 85 percent say they are interested in using online financial tools. This high level of trust, along with the increased comfort level to get online support, puts employers in a unique position to help women break many of the barriers that prevent them from having a successful financial well-being plan.

Where to Start?
That is a question many women ask when it comes to finances. While women are at ease talking about parenting, health and work issues, financial topics like budgeting, investing and savings are taboo. In fact, the Merrill Lynch study found that 61 percent of women would rather talk about the details of their own death than money issues.

1. Acknowledge the issue and talk about it
Given the unique issues facing women about retirement, it’s time to give it higher priority by initiating the conversation. Raising women’s comfort levels in talking about financial issues can be a great first step for employers. Lunch-and-learn sessions or small-group gatherings can be useful opportunities to start a financial conversation. If the live gatherings are inconvenient, offering online webinars can be just as effective.

Initiating a conversation about finances can often lead to creating a plan. In many cases, women know how much they can spend on groceries each week, but they haven’t calculated how much money they will need for retirement, emergency savings or other financial essentials. Helping women recognize the need to answer these questions can help lower stress levels, which will allow them to become more productive at work.

2. Build on strengths
There are a lot of things women already do well, so use those natural strengths to spring into other financial areas. Often women are in charge of balancing the family checkbook, managing budgets and initiating other planning strategies. Recognizing these strengths can be a way to boost a woman’s confidence in managing other financial issues.

Meanwhile, when it comes to investing, women are more conservative than men. While being overly aggressive is certainly problematic, being too conservative carries dangers of its own—especially considering that women should be investing for a longer time horizon than men. Women who reach age 65 are expected to live an additional 20 years on average. Women, by and large, also could benefit from being more aggressive when it comes to the amount that they put away for retirement. The Transamerica survey showed that while 73 percent of women are saving for retirement at work, they are only contributing about 7 percent of pay. Most experts recommend participants save 15 percent of pay each year to reach a healthy retirement savings amount. In addition, Transamerica data showed women’s median account balance at $42,000.

3.Encourage good savings behavior through plan design
Employers can play an important role in improving savings rates of all workers by using automatic features like auto enrollment and escalation. These combined strategies can help eliminate the conservative thinking and guesswork. In general, participants are automatically enrolled into a qualified default investment account, like a target-date fund. Target-date funds are diversified investment accounts that are often tailored to a participant’s retirement age, and not to what a participant might guess would be appropriate for their time horizon.

4. Technology is key
Technology can also play an important role in helping employees become more comfortable and confident when it comes to investing and long-term planning. Today, many providers are offering more than just calculators that factor interest and contribution rates to help figure out finances. Women can gain financial confidence by exploring tools that let them see how changes to their spending, savings and investing behavior—such as increasing Health Savings Account contributions, accelerating debt repayments or taking on more risk in their investment portfolio—are projected to play out of multiple decades.

Women’s lack of retirement preparedness is a major problem for society, especially as millions of baby boomers near retirement age. It also presents a powerful opportunity for employers to engage with this segment of their workforce in a productive and empowering way.

While the need to address retirement planning may seem to be most urgent for older employees who are nearing retirement, the topic is relevant for employees of all ages. In fact, given the power of compounding, the benefits of establishing a retirement savings strategy could be greatest for millennials and other younger workers. Plan sponsors should account for generational differences in attitudes and expectations about retirement when developing a plan for engaging with their employees on this important topic.

In addition to helping women have long-lasting, healthy retirements, raising financial well-being among female workers can have significant benefits for employers as well. The Mercer study showed that 67 percent of women are feeling financial pressures compared to 60 percent of men. Not saving enough for retirement is stressing out 44 percent of women and 36 percent of men. By helping women feel more confident about their long-term financial futures, companies can help their workforces be happier and more productive in the near term.

Offering unique ways for women to talk about their financial issues, giving them tools to quantify and explore different long-term scenarios and increasing participation by using automatic enrollment and escalation features are ways employers can positively impact women’s financial well-being and preparedness for retirement. To discuss ways you can help address this within your own workforce, contact a member of BDO’s ERISA practice.

]]>Tue, 15 May 2018 04:00:00 GMT83cb0f3b-6735-4612-abf9-961af55bde0c
The U.S. House of Representatives passed by voice vote H.R. 5236, known as The Main Street Employee Ownership Act, on May 8. The bill, introduced in March by Rep. Nydia Velazquez (D-NY), eases rules to help the Small Business Administration (SBA) provide loans and other support to companies interested in creating an ESOP.

The bill’s companion piece, S. 2786, was introduced in late-April by Sen. Kirsten Gillibrand (D-NY). This bill gives $500 million to the Small Business Administration for similar purposes. It was referred to the Committee on Small Business and Entrepreneurship.

Shortly after the voice vote, Velazquez tweeted that the bill “will help employee-owned businesses such as co-ops secure access to capital through [the SBA]. After seeing the popularity of food co-ops in NYC, this will help the business model expand to other sectors.”

According to the National Association of Employee Ownership, there are nearly 7,000 ESOPs operating nationwide. To date, ESOPs hold about $1.3 trillion in assets and have 14.4 million participants.

BDO will provide further updates on these bills, as well as other new legislation and regulations affecting ESOPs and other types of retirement plans. In the meantime, if you have questions about how current laws and regulations affect your company’s defined benefit or defined contribution plans, please contact your BDO representative.CONTACT:

]]>Tue, 15 May 2018 04:00:00 GMTb31393b0-9256-40ab-aafc-b2481ed88732th explaining that it would not pursue legal action against investment advice professionals who rely on the Obama Administration’s definition of fiduciary.

According to Field Assistance Bulletin 2018-02 (FAB 2018-02), the DOL said it would not “pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards” set in the fiduciary regulation crafted by the Obama Administration.

That regulation was vacated in March by the 5th Circuit Court of Appeals in the case brought by plaintiffs led by the U.S. Chamber of Commerce against the DOL (case 17-10238). In the decision, the court said that the Obama Administration’s fiduciary requirements were excessive, arbitrary and capricious.

The DOL said it plans to provide guidance in the future, but until then financial institutions should be allowed to rely on the Obama rule. The May 7th FAB recognized that providers have devoted significant resources to comply with the Obama definition of fiduciary and that there may be uncertainty to the rule as a result of the 5th Circuit Court of Appeals decision.

“Of course, investment advice fiduciaries may also choose to rely upon other available exemptions to the extent applicable after the Fifth Circuit’s decision, but the Department will not treat an adviser’s failure to rely upon such other exemptions as resulting in a violation of the prohibited transaction rules if the adviser meets the terms of this enforcement policy,” the FAB said.

BDO is committed to keeping plan sponsors and their service providers updated on the latest guidance from the DOL regarding the fiduciary standard. In the meantime, if you have questions about what the latest guidance could mean for your retirement plan, please contact your BDO representative.CONTACT:

]]>Tue, 15 May 2018 04:00:00 GMT49e8d60a-3924-4b12-9255-3c51d3f399d9Defined contribution plan sponsors face numerous challenges when workers change jobs, and the Department of Labor (DOL) is paying close attention to how employers are dealing with these situations.

Often, outgoing workers don’t provide instructions or forwarding information, leaving it up to the plan sponsor to figure out what to do with the assets that are left behind.

From 2004 to 2013, more than 25 million participants in workplace plans left at least one retirement account behind when changing jobs, according to a January report from the Government Accountability Office (GAO). Meanwhile, the DOL estimates that $15 million in distribution checks goes unclaimed each year.

While the DOL offers guidance for dealing with missing participants in terminated plans, the same is not true for ongoing plans. As fiduciaries, plan sponsors must account for all assets in a plan—whether those checks have been cashed or not.

Plan sponsors should realize that plan participants can be deemed missing because they have not cashed their check. Terminated vested plan participants can also be deemed missing if they simply walked away from the plan and did not request a distribution.

In many cases, searches for missing participants are conducted by plan service providers, such as record keepers, trustees or custodians. But this doesn’t relieve plan sponsors from their fiduciary obligation to make sure procedures are being followed. Not dealing with the issue properly can be considered a breach of fiduciary duty and can entail harsh penalties and other liabilities.

According to an October 2017 letter sent by the American Benefits Council to the DOL, the DOL’s regional offices have been aggressive in investigating plan sponsors’ processes for dealing with terminated vested plan participants. Terminated vested participants are workers who qualify to receive matching contributions, but have left the company and may not be of retirement age. In some cases, regional offices determined that plan sponsors breached their fiduciary duties—even when plan procedures have been followed. In light of the DOL’s aggressive investigations into these issues, plan sponsors should have procedures in place to handle the uncashed distribution checks of missing participants.

Current Guidance and Best Practices
After leaving a company, many plan participants forget to roll over their 401(k) assets into an Individual Retirement Account (IRA) or their next employer’s retirement plan. This doesn’t absolve plan sponsors from their duties, however. It’s critical that plan documents outline policies so plan sponsors can appropriately handle these situations. At a minimum, plan documents should articulate:

The process to be followed in searching for an unresponsive participant

A timetable for plan providers (if applicable) to report progress

The framework for charging fees and moving assets to an outside IRA, as well as a process for documenting these practices

Next steps for unsuccessful searches

While rules allow plan sponsors to cash out small accounts, the GAO report found that more than 13 million accounts of $1,000 or less were left by participants from 2004 to 2013, amounting to $1.2 billion. It may seem like a small amount compared to the trillions of dollars in defined contribution plans today, but many experts agree that the numbers are only going to increase as the workforce continues on its trajectory of greater mobility.

To date, the DOL and the Internal Revenue Service (IRS) haven’t issued direction on how plan sponsors should handle uncashed checks from ongoing plans. Many plan sponsors have relied on Field Assistance Bulletin (FAB) 2014-01, which is meant for finding participants in terminated defined contributions plans. In August 2017, a DOL official offered four best practices for plan sponsors to follow until further guidance is issued:

Send a certified letter to the missing participant using their last known address

Keep detailed and up-to-date records on the attempts to reach the missing participant

Ask co-workers if they know how to find the missing participant

Try calling the missing participant’s cell phone (since most people keep their number when moving to a new residence)

If these four steps don’t successfully locate the missing participant, plan sponsors should consider continuing their efforts. Possible alternatives include hiring a locator service or conducting other Internet searches. It’s important to reiterate that the DOL is placing special emphasis on investigating these issues, and just because plan sponsors made a good faith effort to find someone, it doesn’t mean they’re relieved of certain responsibilities.

Meanwhile, U.S. Sens. Elizabeth Warren (D-Mass.) and Steve Daines (R-Mont.) have reintroduced legislation aimed at creating a national database to help American workers find their missing retirement accounts. The Retirement Savings Lost and Found Act would allow employers to move abandoned accounts to target date funds as opposed to money market accounts. It would also transfer uncashed checks under $1,000 to Treasury securities, which would be logged into the database for workers to find. Lastly, the legislation clarifies the role employers and plan sponsors play in finding workers who have abandoned their retirement accounts. The bill has been referred to the Senate Finance Committee.

BDO Insight: Reevaluate Your Procedures and Coordinate With Service Providers

As the DOL continues its focus on investigating plan sponsors’ practices related to missing participants, plan sponsors should review—and possibly revise—their policies regarding how they handle uncashed distribution checks and other issues related to missing participants. If applicable, plan sponsors should discuss the topic with service providers to make sure everyone is on the same page regarding the processes and availability of information.

If they haven’t done so already, plan sponsors should develop, document, and implement procedures for whenever a worker terminates employment. Creating these procedures should be a priority for plan fiduciaries and committees. In addition, plan sponsors may want to consider doing to following to strengthen their controls related to missing participants:

Maintain and regularly update a list of outstanding checks

Monitor account balances for terminated plan participants

Cash out small account balances—but realize that doing so could increase the number of outstanding checks

Regularly update employees’ contact information

Interested in developing a strategy for dealing with missing plan participants and their assets, please contact a member of BDO’s ERISA practice.

]]>Fri, 04 May 2018 04:00:00 GMT11ef3b2f-61e5-4414-92b9-9251e6ba4d11
Meanwhile, more than a third of participants surveyed in the 2017 Global Benefits Attitudes Survey by consulting firm Willis Towers Watson said they suffered a moderate to severe financial hardship last year. About 80 percent of the survey respondents said they were living paycheck to paycheck.

Whether due to a natural disaster or otherwise, it’s clear that many participants need access to cash to pay for unexpected expenses. Two new laws—the Tax Cuts and Jobs Act (TCJA) and the Bipartisan Budget Act of 2018 (BBA)—coupled with new Internal Revenue Service (IRS) rules for victims of natural disasters have helped broaden defined contribution loan and withdrawal options for participants who find themselves in financial distress.

There are key nuances to the rules affecting loans and hardship withdrawals, so it’s important that plan sponsors familiarize themselves with the changes. In many cases, the new rules provide flexibility not only for participants but for plan sponsors too. Reporting requirements for plan sponsors have been eased, but it’s important to gather the necessary materials as soon as possible, because federal regulators have up to three years to look back on the transactions.

To help plan sponsors understand how these changes affect them and their employees, BDO outlines the old procedures and identifies the notable differences for loans and withdrawals made to victims of natural disasters, as well as participants needing access to their defined contribution plans.

Changes to Loans from Defined Contribution Plans

Participants in 401(k), 403(b) and 457(b) plans can take loans under normal conditions if the plan document specifies that as an option. In general, the total amount allowed is the lesser of 50 percent of the participant’s present vested amount or $50,000. The loan needs to be repaid within five years (except if, as permitted by the plan, used and documented for the purchase of a primary residence), and payments must be made quarterly at a minimum. In some cases, spouses must sign off on the loan and its amount.

For “qualified individuals” living in specified areas affected by 2017’s hurricanes and wildfires, the loan limit increases to the lesser of 100 percent of the participant’s present vested amount or $100,000. These loans are available only through December 31, 2018. Again, in some cases, spouses must give approval of the loan and its amount.

For “traditional” loans, participants must repay the amount borrowed within five years. For disaster victims, the loan repayments can be suspended for one year, but interest on the loan will accrue during that time. If a participant chooses to use the one-year suspension, the participant has five years to repay the amount. Like traditional loans, loans for disaster victims must have a reasonable interest rate.

Plan sponsors can start these loans immediately, but plan documents must be amended to show the new terms. Plan sponsors have until the last day of the first plan year beginning on or after Jan. 1, 2019 to submit the changes.

Additionally, the TCJA extended the loan repayment schedule for advances under normal, non-disaster circumstances. Previously, employees who had an outstanding loan when they left a job had 60 days to pay off the loan. If the participant failed to do this, the loan would be considered a withdrawal and would be subject to income tax plus a 10 percent penalty. For loans taken on or after Jan. 1, 2018, the TCJA changes the deadline to repay loans to the participant’s tax filing date, which could be as late as October of the following year if the extension is taken.

Changes to Hardship Withdrawals from Defined Contribution Plans

Under the previous rules, participants had to take a loan out before moving to the hardship withdrawal. If the plan permitted hardship withdrawals, participants needed to offer proof that there was a severe financial hardship resulting from an extraordinary circumstance—such as an accident or to avoid eviction from a home—to qualify. Participants could take out what was necessary to pay for the expense, and they would not be allowed to contribute to 401(k) and 403(b) plans for six months after the withdrawal. (Participants to 457(b) plans, however, could continue contributing to the plan without delay.) In some cases, spousal consent would be required. The distribution was subject to income tax in addition to a 10 percent withholding tax.

The BBA has loosened some of the old withdrawal rules and has made those changes permanent for all hardships. For plan years beginning after Dec. 31, 2018, participants with hardship withdrawals can contribute to their defined contribution plan without having to wait six months. In addition, participants don’t have to take out a loan first; they can use the hardship withdrawal as their first option.

Participants with 401(k), 403(b) and 457(b) plans who lived in specified natural disaster areas during the time of the event are now allowed to take “Qualified Hurricane Distributions” and “Qualified Wildfires Distributions” (Special hardship withdrawals above the IRS allowed safe harbor hardship withdrawals). Distributions are available through December 2018. Both laws specify that participants can ask for up to $100,000 in total from all of their plans. Qualified disaster distributions are not subject to the 10 percent tax on early withdrawals. Participants are allowed to take out what they’ve contributed, plus interest earned and employer contributions to their accounts, not to exceed the total amount limits.

Participants may, but are not required to, repay the special hardship distribution tax-free. If participants want to take advantage of the opportunity to repay the withdrawal tax-free, they must repay the funds within three years of the withdrawal. There are some exceptions to this rule.

As with the changes to the rules related to normal hardship withdrawals, disaster victims can make contributions to their defined contribution plan during the six months after the distribution. In addition, if the participant is unable to use the distribution to purchase a home prior to the disaster event, the amount withdrawn can be recontributed to an eligible retirement plan.

Plans sponsors are allowed to rely on a reasonable representation of need from the participant to make the loan or distribution. The IRS requires that the plan sponsor make realistic attempts to obtain the missing information as soon as possible. For example, if a spousal consent is required, and the spouse dies, the plan sponsor can make the loan or distribution if there is a reasonable belief that the spouse has died. As soon as possible, though, the plan sponsor must collect a death certificate confirming the event.

Plan sponsors must amend the plan to show the new terms. Form 8915B is available on the IRS website, along with instructions explaining the details of the form.

BDO Insight: Plan Ahead to Help Participants Deal with Hardships

The federal government is providing more flexibility to defined contribution loans and hardship withdrawals and is making a considerable effort to help victims of disasters and their plan sponsors in expediting access to funds needed to rebuild lives. Plan sponsors that want to help their participants gain access to their funds should review plan documents to make sure loans and hardship distributions are allowed. In addition, plan sponsors may consider checking in with their service providers to see whether there are any limitations on making timely loans or distributions when natural emergencies occur. Please contact your BDO representative for help with evaluating plan documents and processes for loans and hardship withdrawals.

For more information, please contact one of the following practice leaders:

Effective in the first quarter of 2018, a number of Accounting Standard Updates (ASUs) take effect for both public entities, and all other entities with calendar year-ends. In the following report, BDO has captured the main provisions of each ASU that went into effect during the first quarter of 2018. Along with the main provisions of the ASUs, BDO provides further guidance, including direct links to the FASB Accounting Standards Update website for each ASU in effect.

Summary

The AICPA continues to adjust and refine the SOC 2 reporting requirements. The most recent release includes significant changes to the Trust Services Criteria and also addresses cybersecurity risks while offering increased flexibility. The AICPA also issued a Description Criteria.

Details

Available for use now, the AICPA has recently released new Trust Services Criteria for SOC 2 reporting. The new criteria will be required for reports with a period that ends on or after December 16 of this year. The recent changes are significant, and require additional time and attention from the companies who issue SOC 2 reports. These changes include:

Trust Services criteria now align with COSO 2013 and lay out points of focus

Separate Description Criteria requirements that specify requirements of the system description, along with implementation guidance.

Effective Date and Transition

Companies are required to use the new criteria for all reports whose period ends on or after December 16th, 2018.

BDO Insights

Prepare for the new standards – sooner rather than later.

If you issue SOC 2 reports or plan to issue a SOC 2 report, it’s essential for your business to understand the new SOC 2 requirements – and how they’ll impact your organization’s SOC 2 reporting process. Early preparation will help companies stay ahead of the curve when it comes to attestation.

BDO’s Third Party Attestation Practice team is dedicated to providing high quality System and Organization Controls attestation services. Backed by one of the world’s largest global networks, BDO tailors SOC services to meet our clients’ unique needs, allowing us to deliver them in the most efficient and cost-effective way possible. Whether you’ve obtained a SOC 2 report in the past, or are planning to do so in the future, we can help you:

Gain an understanding of the reporting needs in light of the updates to the Trust Services Criteria and the Description Criteria;

Develop a SOC 2 reporting plan for the new requirements;

Complete an assessment/gap analysis based on selected SOC 2 criteria against the new requirements;

Identify any reporting gaps to determine any necessary incremental controls and system description updates.

For more information, please contact one of the following practice leaders:

The PCAOB has issued a public request for stakeholder feedback regarding its five year strategic plan. Five new members have been appointed to the Board and they are revisiting the Board’s strategic plan with an open mind to varying ideas and opinions from all interested parties. The PCAOB requests stakeholders to complete a brief 10-15 survey, included below, by May 15, 2018:

Overview

Each year the PCAOB issues a five year strategic plan intended to align its programs, operations and activities with its mission, goals and objectives. Having recently completed its fifteenth year in operation, coupled with the appointment of five new board members this year, the Board is looking for stakeholder feedback regarding this year’s five year strategic plan. Stakeholders include investors, auditors, preparers, audit committee members, and academics. Survey results will be aggregated for analysis and consideration by the board. Survey responses are requested by May 15, 2018.

Audit committees are critical components in the financial reporting chain and committee-work is a year-round commitment. Audit committee duties, responsibilities, and disclosures for public companies are numerous and are governed by regulation and rule-making, U.S. stock exchange listing standards, and evolving corporate governance best practices. BDO has designed a dynamic tool to assist audit committees in fulfilling their obligations and documenting their activities.

The Audit Committee Requirements Practice Aid is available in EXCEL format and is organized by six categories:

Practice Aid Tab - aligns the specific audit committee duties, responsibilities and disclosures with suggested timing and status of completion to be used as a guide in conducting periodic audit committee meetings, communicating with the various stakeholders in the financial reporting and audit cycles throughout the year, and in preparing documentation that supports the activities of the audit committee. The Practice Aid may be further customized by adding rows/columns to document additional activities that may be germane to your industry or for which your organization finds benefit.

Practice Aid Expanded Tab – as an alternative, this tab can be used instead of the Practice Aid as it combines content from both the Rules & Regulations Tab aligned with related audit committee activities contained within the Practice Aid Tab.

Additional Resources Tab – includes related BDO or external resources for your reference within each category.

Note: This practice aid will continue to evolve over time as rule-making, best practices, and resources continue to develop.

We hope you and your fellow audit committee members find this tool useful in aiding you in your oversight of the financial reporting process. ]]>Tue, 17 Apr 2018 04:00:00 GMT6829afc0-5d3f-4663-8d8b-58cc5543b440Download PDF

Summary

The new lease accounting standard begins to take effect in January 2019. In an environment laden

with significant new accounting guidance and disclosure requirements, a new tool issued by the Center for Audit Quality aims to assist audit committees in their oversight of the lease standard implementation by providing an overview of the standard and questions audit committees should be asking, together with specific considerations to ensure a successful implementation.

Details

In April 2018, the Center for Audit Quality (CAQ) released a new tool, Preparing for the New Leases Accounting Standard – A Tool For Audit Committees, as a resource for audit committees in their oversight of the implementation of FASB ASC 842, a standard that fundamentally changes the accounting for leases. The implementation of the new standard will take significant effort, will affect multiple functional areas, and comes on the heels of the extensive requirements of the new revenue recognition standard. The standard is effective for calendar year-end public companies as of January 1, 2019; all other entities are required to apply the leasing standard for annual periods beginning after December 15, 2019. Earlier application is permitted.

The tool provides guidance and sample audit committee questions organized into four sections:

Evaluating the Company’s Impact Assessment – provides questions to facilitate discussion between management, auditors, and the audit committee to evaluate the company’s specific degree of impact from the new standard

Management, with board oversight, needs to communicate transparently with shareholders and other stakeholders as to how the implementation of the new leasing standard impacts the financial statements. Audit committees, of both public and private entities, should ensure not only that the accounting has been done properly but also that new disclosures being provided are understandable to analysts and the investing communities. Equally as important is the consideration of the controls that support the accounting and reporting for the new standard.

Key Areas Identified From Each Section of the Publication

Understanding the New Leases StandardASU No. 2016-02, Leases, changes the accounting for leases primarily by requiring the lessee to recognize on the balance sheet the assets and liabilities arising from all lease arrangements. The standard also includes less significant changes to lessor accounting. Audit committees need to understand these changes together with the expectation that certain systems, processes, and controls will likely need to be timely updated to correspond with the new standard. The audit committee should further be aware that the new standard requires significant judgement. Additional considerations pertain to the identification and measurement of contracts and the related assets and liabilities.

Evaluating The Company’s Impact Assessment
When evaluating the company’s impact analysis, audit committees may want to ask a number of detailed questions aimed at understanding how the assessment was performed, who was consulted within the scope of the assessment, what factors were considered, what “outside” considerations (e.g. debt covenants, income tax effects) exist, when pro-forma/draft financials will be available to the audit committee, and details of conversations with auditors.

Evaluating the Implementation Project Plan
The complexity of the estimates and the effect on multiple functional areas encourage companies to develop a project plan that is communicated to the audit committee. Questions and understanding should be reached in the following areas:

The timing and scope of the implementation project plan

Adequacy of the culture (e.g., tone at the top) and resources to support the plan

Other Implementation Considerations
Audit committees will want to understand management’s transition method[1] and understand certain judgements regarding practical expedients. These judgements should be incorporated into the project. Similarly, audit committees will want to ensure that preparers are transparent in the process and results of implementation. They should be able to articulate in relevant disclosures the impact (estimated when applicable), all relevant facts, and demonstrate a comprehensive analysis of the different accounting alternatives in arriving at reasonable judgements. Audit committee should further keep in mind that additional disclosures are required both before and after adoption. Refer to BDO’s Flash Report: SEC SAB 74 Disclosures and Controls for New Accounting Standards. Finally, thought should be given to company-specific considerations including but not limited to control-readiness and any statutory reporting requirements.

Next Steps
This resource was designed by the CAQ and serves as a valuable resource to audit committees in the execution of their oversight duties with respect to increasing transparency, consistency and reliability within the financial reporting chain.

[1] Note: As of April 2018, upon transition under ASC 842, companies are required to adopt a modified retrospective method that results in a restatement of prior years presented. There is a pending FASB proposal that would allow an alternative transition method to record a cumulative effect adjustment in the year of adoption.

U.S. IPO Market Shakes Off Stock Volatility to Achieve Strong Growth in Q1 Of 2018

Number and Size of Offerings Point to Promising Forecast for Remainder of Year

After two years of diminishing activity, initial public offerings (IPOs) bounced back significantly in 2017 and that momentum has carried over into 2018. Through the first quarter of the year, offerings (+ 76%), proceeds (+57%) and filings (+ 16%) are up substantially year-over-year from 2017.*

The year kicked off with a record January, as 17 offerings generated more than $9 billion in proceeds. It was also the most proceeds for any month since September 2014 when Alibaba went public.

The stock market correction of early February was a major scare, causing some companies to postpone their offerings, but activity began to pick-up through the remainder of the quarter. Q1 closed with a flurry of activity, as 8 offerings priced in the final week of March.

Overall, the 44 offerings in Q1 were the most since 2014 (64), a year that would become the best year for U.S. IPOs since the dotcom boom at the turn of the century. The $15.6 billion in IPO proceeds were the highest for a first quarter since 2008 when VISA’s massive IPO pushed Q1 proceeds to $19.1 billion.

“The U.S. IPO market is off to a strong start in 2018, with offerings, proceeds and filings demonstrating strong year-over-year growth,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA. “This performance is even more impressive when you consider the turmoil that was overcome to achieve these results. After a year of steady stock market growth in 2017, stock volatility returned with a vengeance in Q1. Combined with threats of an impending trade war, a tech sell-off sparked by regulatory fears and seemingly constant political strife, there was no shortage of concerns to cause offering companies to reconsider the timing of their deals, but most IPOs proceeded to price as planned. This would seem to bode well for continued growth moving
forward.”

Industries

The healthcare and technology industries were the clear leaders in IPOs during the quarter, but there was a wide breadth of industries represented among Q1 offerings. In addition to healthcare and tech, the U.S. IPO market saw multiple offerings from the energy, consumer, industrials, real estate and financial sectors.

Unicorn Stampede?

One of the most welcome developments in the U.S. IPO market thus far in 2018 has been the successful IPOs of two unicorn businesses (private companies valued in excess of $1 billion).

On March 16, cloud network security firm, Zscaler, had a first-day pop of +106% which gave it a valuation of $4 billion. One week later, file-sharing company, Dropbox, had a strong market debut with shares jumping 36 percent on the first day of trading. That pushed Dropbox’s market value to $11.2 billion, higher than it had been valued in the private markets.

Following those successful launches, DocuSign, a 15 year-old digital signature company privately valued at $3 billion announced its plans to go public in 2018.

These are reassuring signs for the technology sector and for the investors who have billions locked up in these highly valued, but privately held start-ups. “Whether it was Snap, Blue Apron or the poor IPO performance of another tech-darling, there have been numerous false starts creating difficulty in predicting when the many tech-unicorns would enter the public markets,” said Lee Duran, Partner in the Private Equity Practice of BDO USA. “However, the strong reception for Zscaler and, especially Dropbox - on a day when giant tech companies were driving a sharp sell-off in the greater market - certainly suggests that the time may be right for early-stage investors in the largest private Silicon Valley start-ups to cash-in through an IPO.”

Q2 Forecast

The stock market has been highly volatile in 2018 and some economists question whether stocks remain over-valued despite the recent correction. Investors are anxious about the threat of inflation, the possibility of a trade war, a potential regulatory crackdown on the technology industry and numerous foreign policy and political risks.
Although these concerns bring a certain level of uncertainty for the U.S. IPO market moving forward, the forecast for the remainder of the year remains promising due to several factors:

For many years, the technology industry was the engine of the U.S. IPO market, but in recent years activity from this sector has stagnated. Q1 saw a pick-up in tech IPOs and those offerings produced strong returns. That performance, combined with a potential influx of unicorns encouraged by the positive experience of the Dropbox and Zscaler offerings, bodes well for more highly valued deals from this critical industry.

Eight Chinese companies priced IPOs on U.S. exchanges during Q1, raising $3.3 billion in proceeds, the most in three years. This is a welcome sign from a foreign source that was a strength of the U.S. IPO market just a few years ago.

The full impact of the recent tax cuts has yet to realized. People will have more capital and they will be looking to invest it. IPOs, which offer greater potential return than existing stocks, are one of the areas they will be considering with those funds.

Given these factors – and coming off the best first quarter for proceeds in a decade - it is safe to say that the IPO window is wide open right now.

“In 2017, as stock indexes soared to record highs, the IPO market remained sluggish by historical standards as many potential offering companies that might have typically listed their shares opted to stay on the sidelines,” said Ted Vaughan, partner in the Capital Markets Practice of BDO USA. “During Q1 of 2018, that has started to change. Investors are flush with cash and looking for investments with high returns, while bankers are encouraging potential offering businesses to move quickly to sell shares to the public while valuations remain high. This combination will continue to make for a favorable offering climate in Q2."For more information on BDO’s Capital Markets services, please contact one of the regional leaders:

Summary

The FASB issued ASU 2018-03[1] to address questions raised about its recent standard on financial instruments, ASU 2016-01.[2] The new ASU is available here, and takes effect in 2018 for public business entities. All other entities will apply these amendments under the original transition requirements in ASU 2016-01. Early adoption is permitted as long as the entity has adopted ASU 2016-01.

Background

ASU 2016-01 made targeted improvements to the accounting and disclosure requirements for financial instruments and takes effect in Q1 2018 for public companies. Specifically, it requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale (AFS) debt securities in combination with other deferred tax assets. It provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment, as adjusted for certain observable price changes. That ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements.

Main Provisions

The amendments included in ASU 2018-03 are technical corrections and improvements to ASU 2016-01.

Equity Securities without a Readily Determinable Fair Value – Discontinuation
An entity that elects to use the measurement alternative ASC 321-10-35-2 for equity securities without a readily determinable fair value may change its measurement approach to fair value in accordance with Topic 820[3] through an irrevocable election. When an entity makes this election it not only applies to that security but also all identical or similar investments of the same issuer, including future purchases of identical or similar investments. Otherwise, the entity must continue applying the measurement alternative until either the investment has a readily determinable fair value or becomes eligible for the net asset value practical expedient.

Equity Securities without a Readily Determinable Fair Value – Adjustments
ASC 321-10-55-9 was amended to clarify that the Board intended to remeasure a security under paragraph 321-10-35-2 based on the date of an observable transaction for a similar security, rather than as of the current balance sheet date.

Forward Contracts and Purchased Options on Securities That Lack a Readily Determinable Fair Value
When applying the measurement alternative in ASC 815-10-35-6, the amendments require entities to update all of the inputs to the fair value calculation, not just the inputs related to the change in value of the underlying security.

Presentation Requirements for Certain Fair Value Option Liabilities
This Update clarifies that the presentation guidance for instrument-specific credit risk in ASC 825-10-45-5 should be applied when an entity has elected the fair value option, regardless of whether the election was made pursuant to ASC 815-15[4] or ASC 825-10.

Fair Value Option Liabilities Denominated in a Foreign Currency
For entities that have elected the fair value option, the amount of change in fair value related to instrument-specific credit risk should first be separated from the total change in the fair value of the financial liability using the currency of denomination. Subsequently, the cumulative amount of instrument-specific credit risk should be remeasured into the functional currency of the reporting entity using end-of-period spot rates and presented in accumulated other comprehensive income.

Transition Guidance for Equity Securities without a Readily Determinable Fair Value
The transition guidance in ASU 2016-01 generally requires a modified retrospective transition approach; however, equity securities without a readily determinable fair value require a prospective approach. In response to stakeholder feedback asking whether a prospective transition approach would be acceptable for those equity securities without a readily determinable fair value where the measurement alternative was not applied, the Board clarified it was not. Rather, the prospective transition approach was intended only for instances where the measurement alternative was applied.

Additionally, clarification was made that insurance entities subject to the guidance in Topic 944[5], should use the prospective transition approach for the entity’s entire population of equity securities for which the measurement alternative was elected.

Effective Date and Transition

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01.

For all other entities, the effective date is the same as the effective date in Update 2016-01.

All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01.

]]>Fri, 30 Mar 2018 04:00:00 GMT9ee32e09-75bd-491f-9e18-5930198bd5db
Still, employees have many misconceptions about HDHPs and HSAs. In fact, just a little more than half of Americans say they understand HSAs, according to a March report by the LIMRA Secure Retirement Institute and Insured Retirement Institute. Employers have difficulty understanding these savings vehicles as well.

With more companies using and integrating consumer-driven benefits like 401(k)s and HDHP/HSAs, there’s an opportunity for plan sponsors to learn more about ways to help employees optimize their funding for health and retirement wealth.

BDO addresses some of the most frequently asked questions when it comes to healthcare choices for both employers and employees.

FOR EMPLOYERS

First, why are companies moving to HDHPs?

According to the Kaiser Family Foundation’s 2017 Employer Health Benefits Survey, PPO growth has slowed by 8 percent since 2012, while HDHPs have increased by 9 percent over the same period.

The reasons for this are varied, but most stem from cost. The average employer premium contribution to all plans for single coverage in 2017 was $5,477, compared to the HDHP employer contribution of $5,004 for the same group. The average employer portion to all plans for family coverage was $13,049 last year, compared to $12,982 contribution for HDHP plans only.

What kind of out-of-pocket reimbursement accounts are out there?

Health Reimbursement Accounts (HRAs) are set up and funded by employers to help employees pay for eligible medical expenses. The employer owns the account, and it can be used in conjunction with a flexible spending account (FSA). HRAs can also be paired with an HSA, but there are certain limitations. There is no contribution limit, but the employer can limit the amount carried over to the next year.

Health Savings Accounts (HSAs) are employee-owned accounts, similar to 401(k)s. These accounts must be linked to an HDHP and may be funded by employers and employees (pre-tax). The contribution limits for 2018 are $3,450 for single accounts and $6,850 for families. Also, those aged 55 years and older are allowed to make $1,000 catch-up contributions annually. The money stays in the account until it is used, tax-free for medical expenses. There are penalties if the money is withdrawn for non-medical expenses. The account is portable, meaning owners can take it with them when they leave a job. It can also be used to pay for healthcare in retirement. The money is deposited tax-free, it can grow tax-free, and it can be withdrawn tax-free for medical expenses. It can also be used with a limited-purpose Flexible Spending Account (FSA) or a limited-purpose HSA.

Flexible Spending Accounts (FSAs) set up by employers and may be funded by employees (pre-tax) and employers. The contribution limit for 2018 is $2,650. It’s known as the “use it or lose it account,” but employers can allow up to $500 (set by IRS limits) to be carried over to the following year. It can be paired with HRA as well as an HSA, but there are certain limitations.

Are companies required to contribute to an HSA?

The short answer is no—but some do. The 2017 Year-End HSA Research Report by consulting firm Devenir Group showed that 21 percent of employers made HSA contributions for the year; the average employer amount was $621.

What kind of administrative work is required with an HSA?

For employers, there isn’t a lot of work involved because an HSA is run by a custodian or trustee and is a separate bank account. Employers must set up payroll deferrals and do comparability testing – similar to 401(k) discrimination testing— to make sure company contributions are fair to all workers, and there is a federal penalty for non-compliance. Employers also need to report employee deferrals to HSA accounts as well as employer contributions.

Can employers deduct the HSA contribution as a business expense? And are there any fiduciary responsibilities in offering an HSA?

Yes, contributions can be deducted as a business expense. And in general, the custodian or trustee of the HSA—who is in charge of administering the plan—assumes the fiduciary obligations.

Will an HSA help employees become better healthcare consumers?

That depends on a few factors. There have been studies showing that HSAs can positively change employee behavior. When coupled with a 401(k), workers wind up saving more than those who use one or the other, a 2018 HSA and 401(k) Contribution Analysis by Alight Solutions found.

Another study by the Employee Benefit Research Institute showed that employees with HSAs tend to avoid going to the doctor or refilling prescriptions more than those in other health plans. In this scenario, short-term savings may have an impact on long-term health issues and costs.

FOR EMPLOYEES

What is the benefit of having an HSA?

HSAs are known for having the triple-tax advantage: money goes in tax-free, it grows tax-free, and is taken out for qualified medical expenses tax-free. For example, if you have a $100 medical cost and you’re in the 32 percent tax bracket, that bill really only costs you $68, because the payment for that medical expense is excluded from your taxable income.

If I don’t spend the money in my HSA, do I forfeit it?

The LIMRA study showed 2-in-5 Americans thought they would lose the money at the end of the year, but the truth is that—unlike with FSAs—the money stays in the account because it belongs to the employee. It works like a 401(k), where the employee makes a contribution and the employer may also make a contribution.

What can I use the money for?

Funds must be used for approved medical expenses found in IRS Code 213. People can’t contribute to an HSA once enrolled in a Medicare plan, but HSA dollars can be used to pay for Part B premiums, Part C, and Part D prescription plans, as well as long-term care insurance.

Can I use the money for non-health expenses?

Yes, but it would be subject to income tax rules. Moreover, if you’re under age 65, you would need to pay a 20% penalty tax on the amount withdrawn.

Can HSA dollars be invested in the stock market?

It depends upon the arrangement. Right now, most people use HSAs as a checkbook for current medical expenses and don’t see it as an opportunity for assets to grow tax-free. Some HSA arrangements have a cash threshold employees must meet before they can move money into investments. According to Devenir, $27.5 billion was contributed to accounts in 2017, $22.5 billion was withdrawn, and only about $5 billion, or 18 percent of assets, were held in accounts and not used for medical expenses.

And I can use this money in retirement?

Yes. A couple retiring in 2017 will need $275,000 on average to pay for medical expenses, Fidelity Investments reported last year. It’s a lot of money, and HSAs provide an option to consider when saving for and paying out medical expenses in retirement. A person would need to save less in an HSA account for retiree health expenses than they would in a traditional 401(k), because there would be no tax payment on the money withdrawn from the HSA. In a traditional 401(k), money is deposited tax-free and grows tax-free but it is subject to income tax rules when withdrawn.

BDO Insight: Addressing the Need for HSA and HDPH Education

Funding rising healthcare expenses should be a central part of employees’ retirement planning, and HSAs paired with HDHPs can be an effective part of this planning. But given the misconceptions and confusion surrounding these vehicles, plan sponsors need to first fully understand the nuances of these vehicles to determine whether they will be a good fit for their workforce. Companies that do decide to offer HSAs and HDPHs need to then develop an effective communication strategy to educate their employees on how to take full advantage of these benefits.

Please contact a BDO professional to discuss HSAs and HDHPs and whether they might be an option for your company.CONTACT

]]>Fri, 30 Mar 2018 04:00:00 GMT3a5d3f76-a580-4559-92e4-48c09847ba5f
Financial stress costs companies about $5,000 per employee annually, the Federal Reserve reported in 2010. Although this statistic comes from the period immediately following the financial crisis and recession—and many Americans’ personal balance sheets have strengthened since then—there’s no doubt that workers’ financial stress remains a significant drag on employers’ bottom lines.

To address this problem, employers are increasingly taking a proactive approach through financial wellbeing programs. This year, 91 percent of employers say they will create or expand financial wellbeing strategies, according to a survey by consulting firm Alight Solutions. Meanwhile, just 7 percent say they’ve fully executed on a program, leaving plenty of room for growth.

Companies with solid financial wellbeing programs report high participation in 401(k) and Health Savings Account (HSA) programs. Nearly 90 percent of participants who have access to financial wellbeing programs contribute to their 401(k) plan; 40 percent have an HSA. Only 66 percent of employees who don’t have a financial wellbeing program contribute to their 401(k); only 28 percent have an HSA, Alight Solutions statistics show.

Where Health Meets Wealth: Defining Financial Wellbeing

Financial wellbeing is a relatively new concept with varying definitions. Essentially, financial wellbeing means having enough money to pay for today’s expenses, while still being able to save enough for tomorrow. It has morphed from financial wellness to financial wellbeing, because the definition doesn’t simply focus on money; instead, it integrates a holistic aspect of a person’s life, including finance, health, social, and emotional wellness.

Financial wellbeing is a broad term that employers are trying to define for the particular needs of their employees. And with four generations in today’s workforce, it isn’t an easy task.

Each generation has unique issues related to financial health beyond just saving for retirement and paying for health care. Studies have shown that employees want a trusted source, like their employers, to help them address this diverse set of issues.

While baby boomers may require help understanding the nuances of catch-up contributions to their retirement plans or implementing estate planning strategies, millennials might be trying to pay down student loan and credit card debt. Sandwiched in the middle of these groups is Generation X, many of whom are wrestling with mortgages, saving for their children’s college tuition, and taking care of their parents’ health care needs. Generation Z is just getting started at work and may need a primer on the basics of personal finance.

Meanwhile, more companies are adopting consumer-driven, high-deductible health care plans. Those plans often incorporate HSAs where employees can deposit pre-tax dollars to use for health care needs. Currently, HSAs are mostly used as health care checking accounts; employers and employees aren’t as familiar with their ability to help workers save, invest, and spend tax-free dollars for health care needs in retirement.

No matter where employees fall on the spectrum, there’s a tremendous amount of information for them to process, and it’s clear that the majority feel overwhelmed when it comes to sorting through all of it. Adding to the stress that employees face is the fact that they know they have issues to resolve, but they have trouble figuring out where to start. In addition, workers have reported that financial wellness or wellbeing programs currently available don’t quite fit their needs.

BDO Insight: Developing a Plan Tailored to Your Employees’ Needs

One of the biggest challenges employers face is figuring out how to develop a financial wellbeing plan that is tailored to the needs of their employees. Given the range of financial needs—both across generations and within them—a one-size-fits-all financial wellbeing plan likely won’t be sufficient.

Developing an effective financial wellbeing program starts with getting to know your workforce. Fortunately, recent advancements in data analytics have resulted in powerful tools that employers can use to gain valuable insights into the characteristics and behaviors of their workforces.

Specific data that can be helpful in determining the aspects of a financial wellbeing plan that would be most beneficial for your workforce include:

401(k) and HSA investment allocation

Number of 401(k) loans and average loan amounts

Number of 401(k) hardship loans

HSA usage (if applicable)

Contribution rates to 401(k) and HSA

Age and gender

Absentee rates

Social media intranet usage/hits

Technology is also playing a significant role in the adoption of wellbeing best practices by employees. Mobile applications, sophisticated algorithms, and online programs that empower the user to make smart financial decisions are turning these people from sideline watchers into active players.

Determining where a wellbeing program fits into the company priority scale is another important consideration. Just like their employees, employers have budgets to follow, and making the most out of what is available from all resources is critical. Create preliminary, attainable objectives to focus on the needs of your population and help measure the success of a financial wellbeing program. Then, leverage the power of data analytics to tailor your program to your employees’ needs.

Non-GAAP measures, while providing additional insight into the operations, financial position and liquidity of a company, also remain an area of focus for regulators. A new tool issued by the Center for Audit Quality examines key themes emerging from a series of recent stakeholder discussions which paved the way for creation of a Non-GAAP roadmap for audit committees to follow in their oversight of the financial reporting process.

Overview

In March 2018, the Center for Audit Quality (CAQ) released a new tool Non-GAAP Measures – A Roadmap for Audit Committees, as a culmination of their recent series of stakeholder roundtables designed to solicit discussions around the usefulness and challenges of using Non-GAAP financial measures and to identify opportunities to enhance public trust and confidence in such measures.

The use of non-GAAP measures, particularly in certain industries, has increased in popularity for a variety of reasons including demand from analysts and the need by management to better tell a company’s story about how it evaluates company performance and compensates employees on that performance. Issues arise around the use of these types of measurements when they are not calculated consistently from period to period or comparable to measures disclosed by other companies. Another area of concern that has emerged is that such measures are often not subject to the same financial accounting and reporting control rigors of information prepared under U.S. GAAP.

The presentation and use of both non-GAAP and Key Performance Indicators (KPIs) has been a key focus of the SEC over the years. The SEC staff has issued specific guidance on the presentation of non-GAAP disclosures, made it the topic of several speeches, and continues to issue comment letters to companies where they believe the company has gone astray of reporting requirements. Companies have become more alert to and wary of demonstrating reporting behaviors that indicate “cherry picking” and/or “earnings management” in the eyes of the SEC.

Key Themes Identified from the CAQ Roundtables

The CAQ has been highly focused in this area and held three industry roundtables – focused on pharmaceutical, real estate and technology – that included audit committee members, management, investors, securities lawyers, accountants and auditors. The following discussion themes emerged:

The Roadmap

From here, the CAQ crafted a “roadmap” based on the identification of several key discussion topics for the audit committee to follow in ensuring the non-GAAP measures provide a balanced presentation of company performance. Components of this roadmap include:

Understanding the perspectives of counsel and the external auditor on the company’s use of non-GAAP measures and what procedures may be performed by the external auditor to increase the company’s confidence in its non-GAAP measures.

The CAQ concluded that “…non-GAAP measures that are presented in compliance with the applicable SEC rules and that are transparent, calculated consistently, and comparable across companies can help investors and other users understand a company’s results of operations, financial position, or liquidity. Greater awareness and discussion of non-GAAP measures by audit committees will contribute to high quality reporting that meets the needs of its users.” There remains no “one-size-fits-all” approach but continuing audit committee oversight and dialogue with stakeholders can help set expectations regarding roles and responsibilities, increase auditor engagement and help improve overall understanding in this area.

]]>Wed, 21 Mar 2018 04:00:00 GMT7fd6aee2-2b93-4423-8ea5-ee65702d35edth anniversary of the Roth Individual Retirement Account (IRA). While the Roth IRA has been widely hailed as a powerful retirement saving vehicle because of its tax-free-growth and has seen widespread adoption by individuals who meet the income requirements, the Roth 401(k) isn’t nearly as popular.

That status, however, may change. The recent tax reform law poses an opportunity for employers to take another look at the Roth 401(k). While the new law doesn’t include significant changes for 401(k)s, lower marginal income tax rates may make the Roth 401(k) option slightly more attractive to participants and may spur more plan sponsors to add Roth plans to their benefit offerings.

Before jumping in, however, it is important to determine whether adding the Roth feature is beneficial to your workforce. Analyzing areas like participation rates and age of workforce are important considerations, but it’s also important to see whether there might be additional administrative costs or other issues impacting the overall benefits package as a result of the addition. If Roth is a good option, it’s critical to effectively communicate the differences and the reasons a Roth 401(k)—and the tax-free growth that it offers—might be something for participants to consider.

Roth 401(k) Basics

As the name implies, the Roth 401(k) blends features of the Roth IRA with the traditional 401(k) plan. Accounts are set up similar to traditional 401(k)s, but like the Roth IRA, the Roth 401(k) allows participants to contribute after-tax dollars. In terms of tax benefits, the Roth 401(k) flips the structure of the traditional 401(k): money is taxed (based on an individual’s income tax bracket) going into the plan, and any qualified withdrawals, including the growth of the investment, are tax-free. Employers are allowed to make contributions on behalf of employees, but by law, those dollars must be deposited into a traditional 401(k) account.

The Roth 401(k) was established in 2001, but most plan sponsors waited to offer it until 2006 when the Pension Protection Act made the new savings vehicle permanent. In 2006, only 18.4 percent of companies offered a Roth 401(k), according to The Plan Sponsor Council of America (PSCA).

While Roth 401(k) adoption has grown dramatically since then, it still significantly trails the traditional 401(k) in terms of popularity. Only 63 percent of plans offered a Roth 401(k) option in 2016, according to PSCA’s 60th Annual Survey of Profit Sharing and 401(k) Plans. Compare that to the 94 percent of companies surveyed using a traditional 401(k). What’s more, most participants aren’t taking advantage of the Roth’s tax-free growth benefits; only 18 percent of participants eligible for the Roth strategy made contributions in 2016, the PSCA survey found.

There are several reasons behind Roth’s slow growth. First, it’s a relatively more difficult strategy for plan sponsors to explain to their participants. Second, participants who have been automatically deferred to a traditional 401(k) account tend to stay put. Finally, one of the major factors in determining whether it’s more beneficial to contribute to a traditional or Roth 401(k) is whether the participant’s tax rate during retirement will be higher or lower than the participant’s current tax rate—a difficult prediction to make with any certainty.

Many participants may have overlooked the Roth 401(k) as a retirement savings option because they aren’t eligible to contribute to a Roth IRA due to fairly restrictive income limits. But it’s important for plan sponsors to point out that income limits don’t apply to Roth 401(k)s, so all participants, regardless of income, can participate.

The IRS has created a table that provides a full comparison of the rules related to contribution limits, income limits, taxation of withdrawals and withdrawal requirements for the Roth 401(k), Roth IRA and traditional pre-tax 401(k).

BDO Insight: Roth Could Now Be More Beneficial, But Understanding Costs and Communicating Benefits Are Critical

For plan sponsors that are considering adding the Roth option to their retirement plans, it’s important to remember the following:

Roth plans typically entail additional administrative and payroll requirements, so you will want to work with your service providers to understand these potential issues

Analyzing the demographic and financial makeup of your workforce is an important part of determining whether adding a Roth option makes sense

Employees often struggle to understand the differences between Roth and traditional 401(k) plans, so effective communication is essential

In terms of the last point, the tax-free growth benefits of Roth 401(k)s have become a bit more attractive compared to the upfront tax benefits of traditional 401(k)s because many Americans are now positioned in lower tax brackets. It’s also important to keep in mind that that future legislative action could raise rates.

The Roth benefits are particularly compelling for younger workers, who 1) typically have lower incomes as they start their careers and 2) have more time until retirement to benefit from the Roth’s tax-free growth and withdrawal structure.

When it comes to communicating these benefits to employees, it can be helpful to illustrate the difference between the two 401(k) strategies by using a hypothetical scenario, such as:

Jack is a 25-year-old employee who contributes $15,000 a year to a Roth 401(k) until retiring at age 65; he is currently in the 22 percent tax bracket and expects to be in the 32 percent tax bracket in retirement; he expects to earn a rate of return of 7 percent on his investments

Jill is also 25-years-old, is in the same tax brackets, and expects to earn the same rate of return until retiring at age 65; but rather than contributing $15,000 a year to a Roth 401(k), she contributes the same amount to a traditional 401(k) and invests the rest in a taxable account

Under these assumptions, the after-tax value of Jack’s Roth 401(k) would be $3.1 million at retirement, whereas the after-tax value of Jill’s traditional 401(k) would be $2.6 million. Even if Jack and Jill assume that they will be in the same tax bracket during retirement as they are now (22%), the Roth option is still worth more than $200,000 more than the traditional option.

It’s especially important to show these types of examples to employees who are automatically enrolled in the traditional 401(k) plan. Often, these participants set their contribution schedule and don’t think about it again. But these participants may reconsider if shown the difference in after-tax benefits using actual dollar amounts, rather than abstract financial concepts.

In light of the new tax laws, now could be a good time for plan sponsors to consider adding a Roth component to 401(k) offerings. An effective communication strategy is key in demonstrating to participants the impact a Roth 401(k) can make on saving for retirement. Roth’s benefits, however, need to be considered in light of the potential costs and administrative requirements for plan sponsors and their service providers. To determine whether your organization should consider adding a Roth 401(k) strategy, contact a member of BDO’s ERISA practice.

]]>Fri, 16 Mar 2018 04:00:00 GMT199f1fc5-b7b0-494c-bc37-142c2a99d2f3The Pension Benefit Guaranty Corporation (PBGC) is helping defined contribution (DC) and other plan sponsors looking to terminate their plans by expanding its Missing Participants Program.
For more than 20 years, the program has been available to PBGC-insured single employer defined benefit (DB) plans only. Now, the final rule, published in the Federal Register on Dec. 22, 2017, helps more plan sponsors with the tedious issue of locating missing participants when closing out plans and increases the likelihood that more participants will be reunited with their lost retirement money.

Plans terminating after Dec. 31, 2017, can participate in the voluntary program, including:

401(k)s and other DC plans

Multiemployer DB plans covered by Title IV of the Employee Retirement Income Security Act (ERISA) of 1974

Professional service employer plans with 25 or fewer participants

Single-employer DB plans

To help clients take full advantage of the expanded Missing Participants Program, we’ve outlined the most important changes to the program and highlighted what they mean for plan sponsors terminating their plans.

What’s Changed in the Missing Participants Program

In general, before transferring assets to the PBGC, DC plan sponsors need to follow guidelines issued in the Labor Department’s Field Assistance Bulletin (FAB) 2014-01 outlining the fiduciary duties for those terminating plans.

The new rule stipulates that plan sponsors need to have “reasonable certainty” that the participant’s whereabouts is unknown when the plan is being closed out. Examples in the rule include notices to the participant’s last known address getting returned as undeliverable or uncashed distribution checks. Participants can also be considered missing if they do not elect a form of distribution after being given notice of a plan’s termination.

Then, DC plan sponsors need to follow the five points outlined in the FAB to satisfy the required “diligent search” step. Rules for DB plans have eased, giving them options on the procedure in order to pass the check.

Plan sponsors can transfer missing participant benefits to the PBGC instead of opening an Individual Retirement Account or annuity; the PBGC charges a one-time fee of $35 per account for these transfers. The PBGC will not charge a fee for accounts of $250 or less, nor will it charge for simply reporting information on where the benefits are held. The PBGC also simplified the method DB plan sponsors need to use in determining the appropriate amount to transfer to the agency.

Participants from all types of plans who qualify for the program will be listed in the agency’s searchable database of missing participants and beneficiaries. The agency will also periodically search for missing participants. When one is found, the PBGC will pay out the benefit with interest. There will be no distribution charge.

The PBGC added an anti-cherry-picking clause that says any plan that uses the program must transfer all missing participants to the agency, instead of selectively moving certain accounts.

BDO Insights: What the Changes Mean for Plan Sponsors

Often, plan sponsors don’t realize how time consuming or difficult it can be to find missing participants. It has been a chronic problem for plan sponsors and is frequently left as a last-minute task that can overwhelm already limited resources.

This final rule eliminates unnecessary hoops and gives DB and DC plan sponsors a new, more useful option when dealing with missing participants. It eases the definition of missing participant and gives flexibility for DB plans in diligent search rules. Meanwhile, the database of missing participants will be user-friendly, with information from DB and DC plans. Centralizing information from various plans will increase the likelihood that benefits will be distributed appropriately, or will direct participants to where benefits are being held.

To help plan sponsors understand and take advantage of the expanded program, the PBGC created a webpage outlining the specific requirement variations and forms necessary for each type of plan. Please contact your BDO representative for more information about the PBGC’s new missing participants program.

A return of volatility to the stock market, executive misconduct, seemingly endless reports of cyber breaches, global economic concerns, demands for transparency, and historic changes brought about by the new tax law are just a few of the topics being discussed in corporate board rooms around the country. These issues and many more will make for an intriguing annual meeting season this spring.

WHAT’S ON THE MINDS OF SHAREHOLDERS?

BDO’s Center for Corporate Governance and Financial Reporting recently reports on a variety of topics that corporate management and boards of directors should be prepared to address in connection with their
2018 annual meetings.

Several issues examined this year largely reflect the race to understand broad-reaching impacts and opportunities created by the Trump Administration: The U.S. Tax Cuts and Jobs Act has unleashed a host of questions as to how company strategies are being formulated around M&A, capital investment and asset disposition activities along with operational decisions designed to enhance long term shareholder value. Promises of de-regulation remain but perhaps have yet to be fully realized, as evidenced by the newly effective pay ratio disclosure. Cross-border trade ramifications abound as countries, including the U.S., UK, and others, take “protectionist” stances.

Also notable for 2018 are themes relating to corporate accountability and compliance including: board responsiveness to executive misconduct and cyber-breaches, board refreshment, implementation readiness for significant accounting standards, and other global economic concerns.

BDO USA, LLP has compiled the following list of topics that corporate management and boards of directors should be prepared to address in connection with 2018 annual shareholder meetings:

TAX REFORM
The new tax law is having far-reaching impact on tax reporting/planning and financial statement reporting. The lower corporate tax rate increases the competitiveness of doing business in the U.S., which may encourage corporations to reconsider the U.S. as a focal point for their business activities. Corporate “after tax” cash flow is expected to increase, which may impact decisions related to capital investment and employee wages. Shareholders will be eager to hear how the new law has and will impact corporate strategy. Refer to BDO’s recent Tax Reform and Your Board’s Role webinar and our most recent insights within our BDO Knows: Tax Reform site.

M&A OPPORTUNITIES
The reductions to the corporate tax rate and tax on repatriation of foreign earnings are expected to provide businesses with motivation to pursue mergers and acquisitions in 2018. Shareholders will want to know if management is seeking out both:

Sell side opportunities to dispose of assets that no longer align with corporate goals but that could yet yield favorable returns. For example, an accelerated depreciation provision through 2022 for qualified tangible property is available for both newly purchased assets as well as those acquired through acquisitions. Thus, strategic buyers looking to offset their own tax burdens, or financial buyers looking for faster returns on investment, may find asset acquisitions an enticing strategy. Furthermore, the new corporate tax rate of 21% not only has enhanced after-tax earnings and cash flow but creates a more competitive global rate enhancing the attractiveness of U.S. targets for cross-border transactions.

Buy side opportunities that can enhance strategic growth. Many are pointing to multinational repatriation as a source of funding for acquisitions. However, increased M&A activity might not be as significant as expected given pre-existing favorable market conditions of low interest rates and substantial corporate cash reserves. Companies may consider turning instead to large-scale buy backs of shares. However, companies like Apple have announced plans to reinvest in the U.S. If acquisitions are being contemplated, boards should ensure that such are properly vetted, and that management has sound integration policies in place to assimilate target businesses into a corporate culture supported by strong governance. Buyers should also be aware of other potentially troublesome elements in the new tax law, like interest expense limitations which are applied broadly to many businesses and may affect the economics of the deal.

These are just a few considerations for businesses looking to transact. For additional insights, refer to BDO’s
recent blog. Facts and circumstances will need to be reviewed carefully to fully value the merits or deterrents for each deal. Companies are further advised to clearly communicate how their investment decisions translate to shareholder value.

GLOBAL ECONOMIC CONCERNS
President Trump's plan, announced in late February, to impose high tariffs on imported steel and aluminum prompted angry responses from U.S. allies around the globe and generated warnings of an international trade war that could harm U.S. exports. Investors are concerned how the movements by the U.S. and other countries towards national protectionism will impact U.S. businesses in foreign markets. Shareholders will want to know how boards are proactively addressing management’s operational decisions in this area.

We have touched on several other trends in the U.S. above that are each components of an inter-related global trend. Some additional key areas that may be top of mind to shareholders include:

Changing labor markets – The significant impacts of technology advances – e.g., analytics, artificial intelligence, etc. – can lead shareholders to be asking: What are corporations doing to address these changes? What investments are needed? How is the labor market being re-educated?

Social media exposure – On the one hand, social media provides an instant news source, making the world a more accessible space; while at the same time can result in false reporting (“fake news”) that can wreak havoc on corporate reputations.

Geo-political risk and terrorism create uncertainty and fear in the market that may raise concerns in sectors of the globe that are deemed as “hot spots” for unrest.

Environmental risks – extreme weather, pollution, water crisis, etc. – are creating significant challenges to companies with affected operations or operations that are potentially leading to environmental harm.

Risks brought about by the interconnectivity of the “Internet of Things” (IoT) and cybersecurity – may represent potential global vulnerability to infrastructures: financial, healthcare, transportation, etc.

CYBERSECURITY
Equifax, Uber and even the SEC are just a few of the high-profile institutions to fall victim to cyber-attacks in recent months. These incidents damage company reputations and lead to tens of millions in remediation and legal costs. Given the prominence of this topic, shareholders may want to know whether the company is:

Emphasizing the need to report breaches in a timely fashion. Companies are taking too long to report incidents. The Equifax breach has led to lawsuits in more than 100 courts across the country, many citing the company’s slow response in reporting the breach. In May, the European Union’s General Data Protection Regulation is slated to take effect and companies that fail to report breaches that involve personal data will face a fine of up to 2% of global annual revenue or €10 million ($11.77 million), whichever is higher. Note: We strongly encourage directors to read the SEC’s interpretive guidance released in February 2018 in order to assist public companies in preparing timely and transparent disclosures to investors about cybersecurity risks and incidents.

Vetting management reports on any cyber-breaches with external experts to ensure the company is getting the best advice.

Establishing cyber-risk management requirements for third-party vendors – a major source of cyber-attacks.

Sharing information from cyber-breaches with external entities. The 2017 BDO Cyber Governance Survey found that just one-quarter (25%) of directors say their companies are sharing information gleaned from cyber-attacks with external entities – a practice that needs to become more prevalent for the safety of national security.

EXECUTIVE MISCONDUCT
Steve Wynn, Harvey Weinstein and Roger Ailes are just a few of the executives who have fallen in recent months following allegations of sexual harassment in the workplace. Although the damage to victims may never be able to be fully calculated, for businesses, it can cost millions, from settling with victims to lasting damage to the company brand. Given the prominence of the #MeToo activism movement in the media, shareholders may want to know that the board and management are setting the correct tone at top and creating a culture where all reports of harassment are taken seriously. In many cases, the slow response to allegations of employees highlight the need for businesses to have robust no tolerance policies and document their reactions to charges of misconduct in a timely fashion.

BOARD REFRESHMENT/DIVERSITY
A year ago, the SEC began to look into company disclosures of the ethnic, racial and gender composition of public company boards and whether it should make such disclosures a mandatory requirement in the future. This included a recommendation by the SEC Advisory Committee on Small and Emerging Companies to require companies to describe the extent to which their boards are diverse, and to include in that disclosure information regarding the race, gender and ethnicity of each member. Under new Chairman Jay Clayton, the SEC is continuing to monitor the issue. More recently, BlackRock, the world’s largest money manager, stated that companies in which it invests should have at least two women on their boards. As this issue is likely to become increasingly prominent, shareholders may push companies to be proactive in addressing the issue of board diversity. As there is always resistance to change, companies should consider using the following tools to encourage board refreshment:

Tenure Limits. Continuity is a valuable asset to any board, but it can also be a clear detriment to independence. Moreover, when you have directors serving for 20 odd years, it is difficult to refresh and tackle challenges like diversity in a timely fashion. Tenure limits and mandatory retirement ages can be useful tools to gracefully move directors out the door.

Skill Set Reviews. Defining a matrix of notable gaps in skills required in the coming years can sometimes help boards focus on which directors may have overstayed their welcome. Highlighting emerging operational risk areas requiring additional oversight such as human capital and talent management, technology, digital and content marketing as well as social media, can help further identify potential desired skillsets and needed perspectives to create a balanced board.

Limits on Board Seats. According to the National Association of Corporate Directors (NACD), public company directors spend an average of 245 hours a year on their board duties and the time commitment continues to grow. Given this trend, companies should consider limiting the number of boards on which their directors may serve.

Composition Reviews. Timely reviews as to the adequacy of board composition through the lens of diversification and independence, can be a powerful tool for a board in carrying out its oversight responsibilities. Good business sense encourages boards to bring in new members to better reflect the gender, age and racial mix of their customers. Refer to the recent NASDAQ Governance Clearinghouse article that summarizes ideas from business leaders on how companies can overcome barriers to diversity in the boardroom.

NEW GAAP
Public companies are currently dealing with the most historic accounting changes in decades. New accounting standards for revenue recognition (ASC 606/ IFRS 15), effective for 2018 reporting cycles, followed by lease accounting (ASC 842/ IFRS 16), and credit loss and financial instrument standards (ASC 326 & 825 / IFRS 9), will each have a major impact on financial statements and profitability. Management, with board oversight, needs to communicate transparently with shareholders and other stakeholders as to how these changes will impact financial statements.

In terms of preparedness, the SEC staff has highlighted the importance of appropriate planning for changes to processes, controls and systems, each of which is essential for fulfilling the new reporting and disclosures. The staff expects registrants to provide the estimated impact of the new standards in their SAB 74 disclosure to allow investors to understand the effects. The staff emphasized that preparers should be able to articulate all relevant facts and demonstrate a comprehensive analysis of the different accounting alternatives in arriving at a reasonable judgment related to each transaction. Refer to BDO’s Flash Report: SEC SAB 74 Disclosures and Controls for New Accounting Standards.

There are many lessons to be learned from the adoption of ASC 606 that can and should be applied to the other pending standards that will be quickly following within in the next 12 to 24 months. Audit committees, of both public and private entities, should ensure not only that the accounting has been done properly and new disclosures are being provided but that transparency into the process undertaken by management and the resulting financial information is easily understood by analysts and the investing communities. Equally as important is the consideration of the controls that support the accounting and reporting for these new standards. Directors should be prepared to respond to stakeholder questions about the company’s state of readiness for adoption.

SUSTAINABILITY
Shareholder proposals on environmental, social and governance (“ESG”) issues have taken on new significance and boards should be prepared to listen. Last year, close to two-thirds of Exxon Mobil shareholders approved a proposal to require the company to measure and disclose how regulations to reduce greenhouse gases and new energy technologies could impact the value of its oil assets. Other shareholder groups have expressed similar interest in increased disclosures on sustainability matters (e.g. climate change, corporate social responsibility, etc.) and corporate directors have become increasingly receptive to the issue of providing sustainability metrics in financial statements. In the 2017 BDO Board Survey, a majority (54%) of directors believed that disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment and voting decisions.

Disclosure reporting on sustainability has traditionally been thought of as a “large” organization affair. Global regulations and reporting frameworks in this area abound. However, greater attention in this area is trending in the media as well as in the individual investor and institutional investor communities. As a result, more and more progressive mid-cap and small-cap companies are seeing the potential need to share more with the public about what they are doing to address ESG concerns.

Sustainability measures are non-financial measures that do not fall under the same financial system of controls and thus, do not lend themselves to the traditional scope of financial statement audits. So, as the counter balance to market demands for disclosure of nonfinancial data, in 2017 the AICPA issued an attestation guide providing guidance to auditors who are engaged by companies to provide market assurance on these metrics. It’s safe to predict there will be much more to come on the ESG reporting front.

DEREGULATION

The Trump administration has made deregulation one of the pillars of its agenda. According to the Unified Regulatory and Deregulatory Agenda published by the White House Office of Management and Budget (OMB), the administration withdrew ordelayed 1,579 planned regulatory actions in 2017.

In 2017, the SEC Chairman Clayton, a Trump appointee, outlined his intent to focus on capital formation activities to help businesses raise money they need to grow and provide more ways for “Mr. and Mrs. 401(k)” to participate in the growth of small and medium sized companies. Refer to BDO’s 2017 SEC Year in Review for further information. Shareholders will want to know that management is closely monitoring this changing regulatory landscape in order to plan effectively.

CEO/MEDIAN EMPLOYEE PAY RATIO

Despite emphasis on deregulation above, corporate executives and boards may be in for a rough ride this proxy season. The new SEC rule, established under the Dodd-Frank Act, requiring public companies to disclose the ratio of the CEO’s compensation to that of the median employee in all annual reports or proxies becomes effective in 2018.

The pay ratio rule incorporates estimates and assumptions into the calculation, which may increase speculation of management bias. The SEC adopted interpretive guidance to assist companies in their efforts to make their pay ratio disclosures, while also alleviating concern over compliance uncertainty and potential liability. The guidance reinforces that the SEC is looking for consistency, reasonable basis, and good faith estimates. The SEC further updated its Compliance & Disclosure Interpretations (C&DIs) to reflect the Commission’s guidance and issued separate interpretive guidance to help registrants understand how they can utilize statistical sampling and estimates in making their pay ratio disclosures. The guidance provides hypothetical examples related to the use of sampling and other reasonable methodologies.

Media reports of high ratios are sure to garner attention, so companies would be wise to mitigate any negative press by proactively communicating the benefits of their performance focused executive compensation models to shareholders ahead of time.

These are just some of the many issues that shareholders care about and may bring forth in 2018 and beyond.

RESOURCES

Through our Center for Corporate Governance and Financial Reporting, BDO commits significant resources to keep our clients and contacts up to date on current and evolving technical, governance, industry, and reporting developments. Our thought leadership consists of timely alerts, publications, surveys, practice aids, and tools that span a broad spectrum of topics that impact financial reporting, as well as corporate governance. Our focus is not simply to announce changes in technical guidance, regulations or emerging business trends, but rather expound on how such changes may impact our clients’ businesses. Through our various webinar offerings, we reach a broad audience and provide brief, engaging, just-in-time training that we make available in a variety of ways to meet the needs of your busy schedule.

1. If you already have an account on BDO’s website, visit the My Profile page to login and manage your account preferences

]]>Tue, 06 Mar 2018 05:00:00 GMT660a01bc-6e65-4cbc-8709-9bd75ddfcd56interpretive release (the “release”) that reinforces and expands the guidance on reporting and disclosing cybersecurity risks and incidents that was previously issued in 2011 by the Division of Corporation Finance (the “Division”). This new release became effective on February 26, 2018.

In response to the increasing significance of cybersecurity incidents, the Commission issued this release, which outlines its views with respect to cybersecurity disclosure requirements under the federal securities laws as they apply to public operating companies[1]. In addition this release addresses the importance of cybersecurity policies and procedures and the application of insider trading prohibitions in the cybersecurity context.

The Division’s 2011 guidance reminded registrants that although existing disclosure requirements do not explicitly include cybersecurity risks or cyber incidents, registrants may nonetheless be obligated to make such disclosures. The specific disclosure obligations within the Division’s 2011 guidance included:

Risk Factors

Management’s discussion and analysis of financial condition and results of operations (“MD&A”)

Description of Business

Legal Proceedings

Financial statement disclosures

Disclosure controls and procedures

Each of those specific disclosure obligations were reinforced within the release. Additionally, the release expanded upon the Division’s 2011 guidance by including a focus on the following new topics:

Stressing the importance of cybersecurity policies and procedures - companies were reminded that establishing and maintaining effective disclosure controls and procedures must include considerations for cybersecurity. The Commission also reminded companies to consider the materiality of cybersecurity risks and incidents when preparing their disclosures and included the relevant obligations companies have related to periodic reports, Securities Act and Exchange Act filings, and Current Reports.

Application of insider trading prohibitions in the cybersecurity context - cybersecurity risks and incidents may create material nonpublic information. The Commission encouraged companies to not only consider federal securities laws related to insider trading, but to also review their own insider trading policies and procedures already in place to prevent trading on the basis of material nonpublic information related to cybersecurity risks and incidents. In addition, the Commission expects companies to have policies and procedures to ensure that any disclosures of material nonpublic information related to cybersecurity risk and incidents are not made selectively, and that they comply with the Regulation FD disclosure requirements.

Board risk oversight disclosures – expands to include cybersecurity risks when disclosing how the board of directors administers its risk oversight function.

Shortly after the release, Chairman Clayton issued a statement summarizing the new topics and encouraging companies to “examine their controls and procedures, with not only their securities law disclosure obligations in mind, but also reputational considerations around sales of securities by executives.”
Consistent with the Division’s 2011 guidance, the Commission’s release reinforced the notion that companies are not to provide a “roadmap” on how to compromise their systems. Instead, companies are to provide meaningful disclosures that would be material to an investor and to provide such disclosures in a timely fashion.
For questions related to matters discussed above, please contact:

[1] This release does not address the specific implications of cybersecurity to other regulated entities under the federal securities laws, such as registered investment companies, investment advisers, brokers, dealers, exchanges, and self-regulatory organizations.

Summary

The FASB issued ASU 2018-02[1] to provide entities an option to reclassify certain “stranded tax effects” resulting from the recent U.S. tax reform from accumulated other comprehensive income to retained earnings. This new standard is available here, and it takes effect for all entities in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.

Details

Background
Under ASC 740, the enactment of the Tax Cuts and Jobs Act (“tax reform”) on December 22, 2017 requires an entity to remeasure all U.S. deferred income taxes using a new 21 percent rate, a significant reduction from the previous corporate income tax rate of 35 percent. The cumulative deferred income tax adjustment is recognized as a component of income tax expense from continuing operations. However, deferred income taxes originally recognized through OCI were initially measured at the previous income tax rate of 35 percent. Therefore, recognizing the cumulative tax rate adjustment through income tax expense would result in a disproportionate tax balance remaining in AOCI (i.e., “stranded tax effect”) that would be recycled to earnings in future periods.

The FASB was informed this accounting outcome may be confusing to financial statement users and also have a negative impact on regulatory capital for banks.

Main Provisions
Under the ASU, reporting entities will select an accounting policy to either reclassify all stranded tax effects caused by tax reform from AOCI to retained earnings, or continue recycling stranded effects (including those caused by tax reform) through earnings in future periods. Further, disclosure of either policy is required in all cases.

The reclassification from AOCI to retained earnings is presented in the statement of shareholders equity.

If elected as a policy, the reclassification entry should include the following:

The effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of tax reform related to items remaining in AOCI. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included.

Other income tax effects of tax reform on items remaining in AOCI (e.g., state taxes) that an entity elects to reclassify, consistent with the required disclosure of such other tax effects.

Required Disclosures
All entities must disclose their accounting policy for releasing stranded tax effects from AOCI, i.e., either to retained earnings or income tax expense (benefit). As part of this, entities should also disclose whether the policy for releasing income tax effects from AOCI occurs on an individual item or portfolio basis.

The policy election must be disclosed when the ASU is adopted. That is, an entity electing to reclassify must disclose both of the following items in the period of adoption:

A statement that an election was made to reclassify the income tax effects resulting from tax reform from AOCI to retained earnings, and

A description of the other income tax effects, if any, from tax reform that are reclassified from AOCI to retained earnings.

Alternatively, an entity must disclose in the period of adoption that it has not elected to reclassify these amounts to retained earnings.

Lastly, an entity electing to reclassify stranded tax effects retrospectively (see below) is also required to disclose the following in the first interim and annual period of adoption:

The nature of and reason for the change in accounting principle

A description of the prior period information that is retrospectively adjusted, and

The effect of the change on the affected financial statement line items.

Effective Date and Transition

The ASU is effective for all entities in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

Early adoption is permitted for public business entities for which financial statements have not yet been issued, and for all other entities for which financial statements have not yet been made available for issuance.

Entities have the option to record the reclassification either retrospectively to each period in which the income tax effects of tax reform are recognized, or at the beginning of the annual or interim period in which the amendments are adopted.

For example, Company “X” is a calendar year entity that does not elect early adoption in the 2017 annual financial statements, or in any interim period in the 2018 calendar year. Consequently, X will adopt the ASU in the first interim period of the 2019 calendar year. If X elects to reclassify stranded tax effects caused by tax reform, it can make the equity reclassification in the opening balances on 1/1/2019, or in the equity balances of the first comparative period presented.

BDO Observation

Reporting entities need to evaluate whether a reclassification within equity will provide relevant information to users by avoiding the future disproportionate impact on income tax expense when the underlying gains and losses are released from AOCI. A prospective effective date (i.e., calendar 2019) provides entities with time to evaluate the optional reclassification approach and to quantify the associated journal entry, if it is elected.

An entity will need to determine not only the stranded effect caused by the corporate income tax rate reduction, but also any other stranded tax effects attributable to tax reform such as potentially the transition from a worldwide tax system to a territorial system and state income taxes.

The effect of a valuation allowance on the reclassification amount must be carefully evaluated.
When a full or partial valuation allowance was previously maintained, or is maintained as of the enactment date, it is essential to determine what portion was or is currently recognized or adjusted through OCI versus income tax expense.

For example, there is no stranded effect as of the enactment date when a deferred tax asset in OCI is fully offset by a valuation allowance that was also recognized in OCI because the income tax rate differential impact on the gross deferred tax asset is offset by an equal impact on the gross valuation allowance. That is, there is no net tax-related balance in OCI for this deferred tax asset as of the enactment date.

Similarly, there is no stranded effect when a deferred tax asset and valuation allowance for the same amount were originally recognized through OCI, but subsequently the valuation allowance was released through income tax expense. This is because the income tax rate differential impact on the gross deferred tax asset is offset by an equal impact on the gross valuation allowance in OCI. That is, there is no net tax-related balance in OCI for this deferred tax asset as of the enactment date.

Conversely, a stranded tax effect exists for a deferred tax asset that was originally recognized in OCI with no valuation allowance (i.e., there was “initial recognition” of a tax benefit in OCI), but the valuation allowance was subsequently recognized in income tax expense. In this example, there is a tax-related balance in OCI as of the enactment date. If elected as an accounting policy, a reclassification entry would be required for the income tax rate differential on the gross deferred tax balance.

]]>Mon, 26 Feb 2018 05:00:00 GMT5ca49535-00fd-4262-8939-625325303eeeStaff Accounting Bulletin (SAB) No. 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effect(s) of the Tax Cuts and Jobs Act of 2017 (the Act) in the period of enactment (refer to BDO’s alert SEC and Tax Reform, SAB 118).

Since then, the SEC staff has received questions concerning: (1) accounting for changes in estimates between the earnings release and filing dates, and (2) the adoption of an income tax accounting policy related to Global Intangible Low-Taxed Income tax (GILTI tax). In response, the staff has recently provided additional interpretive guidance which is summarized below.

SAB 118 Guidance – change in estimate(s) between earnings release date and filing date:
The staff views the accounting for one or more tax effects related to Tax Reform as falling into one of three outcomes:

Accounting is completed – Recognize all income tax effect(s) that are considered “complete” by the due date of the financial statements.

Reasonable estimate(s) – Determine and recognize reasonable estimate(s) if the assessment and quantification of some or all of the Income tax effect(s) are incomplete by the due date of the financial statements.

Accounting is incomplete – Apply the tax law in effect prior to the Act if a reasonable estimate cannot be made by the due date of the financial statements.

Generally, management’s decisions and expectations as to whether the accounting for one or more tax effect(s) is complete, is based on a reasonable estimate, or is incomplete are assumed to be made by the earnings release date, i.e., by the time an entity closes its books.

The staff understands entities will continue to refine and finalize reasonable estimate(s) for a period of time, i.e., until all necessary information, data, interpretations, and calculations have been completed. Therefore, continuous refining of estimates after the earnings release date and before the filing date of a Company’s financial statements would not require updating the accounting unless the changes stem from an error.

The staff encourages a balanced approach – i.e., use professional judgment and practical considerations when there is new information that would result in a material adjustment to a Company’s initial estimate after the earnings release date and before the filing date of the Company’s financial statements. Under these circumstances, the staff would not object to a company updating the accounting for a material adjustment prior to filing the financial statements.

GILTI Tax – Accounting Policy Choice & Preferability Letter:
The FASB staff issued a Q&A on January 22, 2018 regarding the “Accounting for Global Intangible Low-Taxed Income” tax (GILTI tax) and concluded that GILTI tax can be recognized in the financial statements per an accounting policy choice by: (1) recording a period cost (permanent item) or (2) providing deferred income taxes stemming from certain basis differences that are expected to result in GILTI tax.

The staff believes that an accounting policy to recognize deferred income taxes for GILTI tax can be made within the SAB 118 measurement period and would be considered adopted in the first period that material deferred income taxes are provided. Once adopted as a policy, a preferability letter would be required to make a change.

The staff expects that reporting entities subject to GILTI tax would begin to recognize the estimated current tax impact as a component of the annual effective tax rate calculation, notwithstanding the possibility that they might later decide to provide deferred income taxes for GILTI tax. That is, recognition of a current income tax provision (starting in Q1-2018 for calendar year entities) does not necessarily establish an accounting policy.

This accounting would be appropriate only as long as the entity has yet to recognize material deferred income taxes and has appropriately disclosed (as part of SAB 118 disclosures) the fact that it is still considering or evaluating its accounting policy choice.
For questions related to matters discussed above, please contact:

Summary

The FASB recently issued ASU 2018-01[1] to ease the adoption of ASU 2016-02, Leases (Topic 842), for entities with land easements that exist or expire before an entity’s adoption of Topic 842. The ASU will benefit entities that do not account for those land easements as leases under existing GAAP (Topic 840). The new amendment is available here. Its effective date and transition requirements are the same as ASU 2016-02, i.e., beginning in 2019 for public business entities.

Background

Currently, there is diversity in practice in the accounting for land easements.[2] Entities typically account for their land easements by applying Topic 350, Intangibles–Goodwill and Other, Topic 360, Property, Plant, and Equipment, or Topic 840, Leases. Entities that do not currently account for their land easements under Topic 840 indicated that evaluating all existing or expired land easements in connection with the adoption of Topic 842 would be costly and complex. They note that there will be limited benefit as many of their land easements are already on the balance sheet since they are prepaid, and many of them would not meet the definition of a lease under Topic 842.

Main Provisions

The amendments are intended to reduce the cost and complexity associated with assessing whether all existing and expired land easements meet the definition of a lease. They allow entities who previously did not account for land easements under Topic 840 to elect a transition practical expedient to not assess those land easements under Topic 842. Once an entity adopts Topic 842, it must apply that Topic prospectively to all new or modified land easements, and may only apply the guidance in Example 10 of ASC 350-30 after concluding that a land easement does not meet the definition of a lease in Topic 842. An entity that currently accounts for land easements under Topic 840 may not elect this practical expedient.

Effective Date and Transition

The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02, which takes effect in 2019 for public business entities and 2020 for all other entities, but may be early adopted. An entity that early adopted Topic 842 should apply the amendments in this Update upon issuance.

The comment letter relates to the proposed Accounting Standards Update (ASU), Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. We generally agree with, and support finalizing, the ASU with adoption being optional.

The comment letter relates to the proposed Accounting Standards Update (ASU), Leases (Topic 842): Targeted Improvements. We generally agree with, and support finalizing, the ASU but have concerns about certain amendments as well as suggestions for improving them. We also identified additional technical corrections that we believe the Board should deliberate and expose for public comment as part of its ongoing targeted improvements project.

Summary

The FASB recently posted a Q&A stating the FASB staff would not object to private companies and not-for-profit entities applying SAB 118 on the application of Topic 740 in the reporting period that includes the date on which the 2017 Tax Cuts and Jobs Act was signed into law. The Q&A is available here.

Background

The Securities and Exchange Commission (SEC) staff issues statements expressing a view on applying topics in the FASB Accounting Standards Codification (ASC) and/or disclosure requirements through staff accounting bulletins (SABs). These statements represent the practices and interpretations followed by the SEC staff. Historically even though the SEC staff’s views and interpretations aren’t directly applicable, private companies and not-for-profit entities have chosen to apply the guidance in the SABs.

When the 2017 Tax Cuts and Jobs Act (Act) was signed into law, the SEC staff released SAB 118 for applying Topic 740, Income Taxes as it relates to the Act. SAB 118 outlines the approach companies may take if they determine that the necessary information is not available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effect(s) of the Act by the time the financial statements are required to be filed. Companies may use this approach when the timely determination of some or all of the income tax effect(s) from the Act is incomplete by the due date of the financial statements. SAB 118 also prescribes disclosures that reporting entities must provide in these circumstances. Refer to SEC and Tax Reform, SAB 118 for more information on the Act.

Main Provisions

The FASB staff would not object to private companies and not-for-profit entities applying SAB 118, which the staff believes complies with GAAP. This view is based upon the historical application of SABs by private companies and not-for-profit entities.

The FASB staff also believes that a private company or not-for-profit entity opting to apply SAB 118 would need to do so in its entirety, including the disclosure requirements. Such reporting entity should also disclose its accounting policy of applying SAB 118, required by ASC paragraphs 235-10-50-1 through 50-3.[1]

Matters ranging from anticipated disclosures to heightened audit committee responsibilities abound as we round up developments in corporate governance and financial reporting this year. 2018 promises to be a year of "firsts" for adoption of significant accounting and auditing standards; contemplation of new COSO and cybersecurity risk management frameworks; and U.S. tax reform impacts. Couple these with continued emphasis on reporting transparency along with disruptors and opportunities arising from evolving technologies and analytical capabilities, there is a full plate to digest. Learn how each of these may impact public and private companies and their audit committees for the foreseeable future.

Summary

The PCAOB has issued Staff Guidance related to Auditing Standard 3101 that will help both firms and audit committees as required changes to auditor reporting are implemented this audit cycle for audits of fiscal years ending on or after December 15, 2017.

Details

On December 4, 2017 the PCAOB issued Staff Guidance, Changes To The Auditor’s Report Effective For Audits Of Fiscal Years Ending On Or After December 15, 2017 (Staff Guidance), to help audit firms in implement changes to the auditor’s report under AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. This Staff Guidance was subsequently updated as of December 28, 2017. The Staff Guidance covers key changes to the auditor’s report that are effective this year, including changes relating to the disclosure of auditor tenure, a statement on auditor independence, and a required explanatory paragraph on Internal Control Over Financial Reporting (ICFR) in certain circumstances. The Guidance also provides a high-level overview of the requirements relating to Critical Audit Matters (CAMs).

Key Changes to the Auditor’s Report for Current Audit Cycle:

Form of Auditor’s Report

The new standard requires that the Opinion on the Financial Statements section be the first section, immediately followed by the Basis for Opinion Section. Additionally, section titles have been added to the auditor’s report to guide the reader. Appropriate section titles are to be included for explanatory and emphasis paragraphs, such as when a going concern explanatory paragraph is included within the auditor’s report.

Addressee

The new standard requires that the auditor’s report be addressed to the shareholders and the board of directors, or equivalents for companies not organized as corporations. The Staff Guidance includes the following examples of addressees for companies not organized as corporations:

The plan administrator and plan participants for benefit plans;

The directors (or equivalent) and equity owners for broker dealers; or

The trustees and unit holders or other investors for investment companies organized as trusts.

Auditors can assess, based on the individual circumstances, whether or not to voluntarily include additional addressees in the auditor’s report.

Auditor Independence

The new standard requires a statement in the Basis for Opinion section that the auditor is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.

Auditor Tenure

The new standard requires a statement in the auditor’s report containing the year the auditor began serving consecutively as the company’s auditor. The disclosure of tenure should reflect the entire relationship between the company and the auditor, taking into account firm or company mergers, acquisitions, or changes in ownership structures. For example, when a company acquires another company, if the acquirer’s current auditor continues serving as the combined company’s auditor, auditor tenure would continue. However, if the acquired company’s auditor is selected to serve as the combined company’s auditor, auditor tenure would begin at that time. Auditor tenure is not affected by the Company’s status as a public company. If a company went public and maintained the same auditor, auditor tenure will include the years before and after the company became subject to SEC reporting requirements.

The Staff Guidance states that in determining the year the auditor began serving consecutively as the Company’s auditor, the auditor will look to the year when the firm signs an initial engagement letter to audit a company’s financial statements or when the firm begins performing audit procedures, whichever is earlier. The Staff Guidance provides the following examples on determining auditor tenure:

If the auditor signs the engagement letter in January 2012 to audit a company’s financial statements for the year ended December 31, 2012, and the auditor’s report is dated February 28, 2013, the auditor would state 2012 as the year the auditor began serving consecutively as the company’s auditor.

If the auditor signs the engagement letter in December 2011 to audit a company’s financial statements for the years ended December 31, 2010, 2011, and 2012, the auditor would state 2011 as the year the auditor began serving consecutively as the company’s auditor.

If the auditor signs the engagement letter in January 2013 to audit a company’s financial statements for the years ended December 31, 2010, 2011, and 2012, the auditor would state 2013 as the year the auditor began serving consecutively as the company’s auditor.

In the absence of other evidence about when the auditor signed an initial engagement letter or began performing audit procedures, tenure can be determined based on the year in which the auditor first issued an audit report on the company’s financial statements or, if earlier, the auditor’s estimate of when work would have commenced to enable the issuance of such report.

If there is uncertainty as to the year the auditor began serving consecutively as the company’s auditor, the auditor should state that the auditor is uncertain and provide the earliest year of

which the auditor has knowledge. The Staff Guidance provides the following example of such a statement:

We are uncertain as to the year we [or our predecessor firms] began serving consecutively as the auditor of the Company’s financial statements; however, we are aware that we [or our predecessor firms] have been Company X’s auditor [or Company X’s auditor subsequent to the Company’s merger] consecutively since at least 19XX.

For an investment company that is part of a group of investment companies, the new standard requires that the auditor’s statement regarding tenure will contain the year the auditor began

serving consecutively as the auditor of any investment company in the group. The Staff Guidance provides the following example to illustrate this:

If Firm A has been auditing investment companies in XYZ group of investment companies since 1980, the current auditor’s report for XYZ fixed income fund, whose inception date was in

2010, will state that Firm A has served as the auditor of one or more XYZ investment companies since 1980.

Auditor Reporting Regarding ICFR

In certain circumstances, management is required to report on the Company’s ICFR, but such report is not required to be audited. In such cases, the auditor is required to include explanatory language to that effect in the Basis for Opinion section. The annotated example included in the Staff Guidance illustrates this presentation by adding the following explanatory language:

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Key Changes to the Auditor’s Report for Future Audit Cycles:

The Staff Guidance addresses the following key change to the auditor’s report effective for audits of fiscal years ending on or after June 30, 2019 (for large accelerated filers) and December 15, 2020 (for all other filers):

Critical Audit Matters

The Staff Guidance provides an overview of requirements to disclose Critical Audit Matters (CAMs) and reminds auditors that CAMs may be included voluntarily before the effective date or for

entities for which the requirements do not apply.

Note: Communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and

employee stock purchase, savings, and similar plans.

Next Steps:

Refer to BDO’s infographic available within the BDO Center for Corporate Governance and Financial Reporting. BDO intends to continue to provide external thought leadership and training

opportunities as they are developed.

Furthermore, audit committees, particularly accelerated filers, are encouraged to begin proactively discussing with their auditors and management matters that could potentially be considered CAMs in advance of when those provisions of the standard become effective.
For more information, please contact one of the following practice leaders:

Having recently completed several major long-term projects, the Financial Accounting Standards Board in 2017 shifted its attention to assisting stakeholders with implementing new standards and resolving practice issues.
Our year in review newsletter summarizes the year’s most significant changes in guidance, including:

Clarifying the definition of a business

Simplifying the goodwill impairment test

Targeted improvements to hedge accounting requirements

Simplifying the accounting for certain financial instruments with down round features

Our newsletter also discusses implementation of major new standards, previews what to expect in 2018, and summarizes the effective dates for all recently-issued accounting standards.

U.S. IPO Activity to Build on Positive 2017

Bankers Projecting 30 Percent Increase in Proceeds in 2018

Initial public offering (IPO) activity on U.S. exchanges was a bit of a rollercoaster ride in 2017, beginning slowly in the first quarter of the year before building to a frenzy of offerings in the Spring. That was followed by a relatively calm summer, prior to a flurry of activity in the fall to close out the year. In the end, by any measure, 2017 was a positive year for IPOs with virtually every statistical category – offerings (+52%), proceeds (+89%) and filings (+59%) – up significantly from 2016.*

According to the 2018 BDO IPO Outlook, BDO USA’s annual survey of capital markets executives at leading investment banks, there were multiple factors for the increase in offerings. When asked to identify the primary factor behind the jump in IPOs, an increased confidence in the U.S. economy (38%) is most often cited. Other drivers identified by the bankers were positive IPO performance encouraging additional offerings (18%), pro-business climate of the Trump administration and Republican-controlled Congress (18%), continued low interest rates pushing demand for higher yielding assets (13%) and increased investor cash flow into stockfocused
mutual funds (13%).

TRUMP BUMP

In last year’s BDO IPO Outlook survey, more than two-thirds (68%) of the capital markets community indicated that they felt President-elect Trump and the Republican-controlled Congress would have a positive impact on the U.S. IPO market.

This year, looking back over 2017, a majority (58%) of the bankers feel the new President and Congress did have a positive impact on U.S. IPOs, compared to one-third (33%) who feel they had no impact on offering activity. Only nine percent indicated the President and Congress negatively impacted the market.

"In 2017, the U.S. IPO market bounced back from two consecutive years of dwindling offerings and proceeds raised. Capital markets executives clearly feel that the growth of the past year will continue in 2018 as they project significant increases in both the number of IPOs and in total proceeds raised,” said Christopher Tower, a Partner in the Capital Markets Practice of BDO USA. “Given the strong performance of last year’s offerings, the overall strength of the economy and low volatility in the greater stock market, many factors appear to be in place for a healthy IPO market in the coming year.”

2018 FORECAST

Looking forward, the capital markets community is projecting significant growth in the number of initial public offerings (IPOs) on U.S. exchanges in 2018. Close to three-quarters (72%) predict an increase in the number of U.S. IPOs in the coming year, with eighteen percent describing the increase as substantial. One-fifth (20%) forecast activity as staying about the same as 2017, while just 8 percent are projecting a decrease in offerings.

Overall, bankers predict an 11 percent increase in the number of U.S. IPOs in 2018. They anticipate these offerings will average $260 million, which projects to $46 billion in total IPO proceeds on U.S. exchanges. This would represent an increase of 30 percent from 2017 proceeds.

When asked for the most likely factor to spur increased IPO activity in 2018, 38 percent of the bankers cite continued positive returns from new offerings. Other potential drivers identified by the executives are a positive impact from meaningful tax reform (23%), the pricing of a major “name” offering (18%), continued regulatory rollbacks under the Trump administration (15%) and less favorable private valuations forcing businesses to the public markets (6%).

Dropbox, Ancestry.com, Lyft, Pinterest and Spotify are just a few of the intriguing businesses considering a potential offering in 2018.

INDUSTRIES

For the fifth consecutive year, the healthcare industry was the bellwether of the U.S. IPO market – spawning 29 percent of total U.S. offerings in 2017 – and most capital markets executives are projecting even more IPOs in the healthcare sector in 2018. Overall, a majority of bankers are forecasting increases in IPOs from the technology (89%), biotech (71%) and healthcare (60%) industries. In addition, close to half of the executives also project an increase in offerings in the financial (45%) sector. (see chart below).

Industry

Increase

Stable

Decrease

Technology

89%

10%

1%

Biotech

71%

24%

5%

Healthcare

60%

29%

11%

Financial

45%

36%

19%

Energy/Natural Resources

38%

39%

23%

Media/Telecom

38%

34%

28%

Industrial/Manufacturing

36%

42%

22%

Real Estate

28%

48%

24%

Consumer/Retail

20%

20%

60%

“A strength of last year’s IPO market was the wide breadth of industries represented among the offerings, with six sectors achieving double digits in deals,” said Ted Vaughan, Partner in the Capital Markets Practice of BDO USA. “Healthcare, biotech, technology and financial industries led the way in IPOs in 2017 and the capital markets community believes those sectors will continue to lead the way in the new year.”

SOURCES & ATTRIBUTES OF 2018 IPOs

Private equity (40%) and venture capital (37%) portfolios are the most often mentioned sources of IPOs in the coming year. Spinoffs/divestitures (14%) and owner-managed, privately-held businesses (9%) are the other sources identified by the bankers.

When asked what offering attribute will be most valued by the investment community in 2018, three-quarters of the bankers cite either long-term growth potential (43%) or innovative businesses offerings/products (32%). Profitability (12%) Stable cash flow (11%), and low debt (2%) are mentioned by smaller proportions of participants.
​

THREATS TO 2018 IPO MARKET

There isn’t one obvious answer when I-bankers are asked to identify the greatest threat to a healthy U.S. IPO market in 2018. Almost one-third (33%) cite global political and economic instability, while just over one-fifth (22%) identify inflated private valuations that will not be supported in public markets.

Smaller percentages of capital markets executives focused on domestic political instability (18%), a failure of the Trump administration to deliver on deregulation (14%) and Federal Reserve rate hikes (13%).​

EXCESSIVE SEC REGs?

Despite the increase in IPOs on U.S. exchanges in 2017, offerings remain well below the all-time highs of the late 1990s. Some blame excessive SEC disclosure requirements for the drop-off in offerings. In contrast, others contend that there have been numerous changes to ease SEC regulations in recent years - such as the JOBS Act, allowing confidential filings and reducing disclosure requirements - to make it easier to navigate the IPO process.

When asked whether they view SEC regulations as the reason for the historical drop in IPOs from the 1990s, just 24 percent of the capital markets community agreed. A clear majority (76%) were more likely to attribute the reduction in offerings to the wide availability of private financing, high M&A activity, more discerning investors or other factors.“With an unprecedented level of private capital in the marketplace, the number of private businesses that have conducted numerous financing rounds has increased considerably in recent years,” said Lee Duran, Partner in the Private Equity Practice of BDO USA. “With companies staying private longer, they can mature, become more profitable and more stable prior to going public. Although that slows the timeline to an IPO, in the end, it is a good thing for investors and the economy.”

IPO ALTERNATIVES?

Despite numerous detractors who question its value, Bitcoin, the world’s most prominent cryptocurrency soared in value in 2017. Given this rapid increase, many businesses have begun to use the craze for cryptocurrencies as an opportunity to raise financing through initial coin offerings (ICOs).

Unlike traditional IPOs that give buyers shares or stock options in exchange for purchase, ICOs don’t give buyers any ownership rights in the company. Instead, startups raise money in exchange for a new digital coin that may be traded or grow in value. According to data provider Autonomous Research, companies raised more than $4 billion via ICO fundraising in 2017.

Despite ICOs becoming increasingly common in 2017, with some start-ups raising hundreds of millions in capital, less than one-fifth (19%) of capital markets executives view ICOs as a future threat to traditional IPOs.

A majority (64%) of bankers expect to see increased interest in Regulation A+ offerings which can raise up to $50 million in a 12-month period under scaled down regulations, but are not listed on exchanges. A slightly smaller majority (55%) view Regulation A+ offerings as an attractive alternative to a traditional IPO for smaller businesses.“Given the pioneering nature of ICOs and the inherent volatility of cryptocurrency, there is a wide range of sharply divided opinions on this fundraising practice. Supporters view it as a legitimate disruptive threat that can transform the way companies capitalize themselves, while detractors consider ICOs nothing more than a passing fad,” said Paula Hamric, Partner in BDO USA’s National SEC Practice. “A strong majority of the investment banking community clearly sides with skeptics. As the SEC has recently issued a strong warning on ICOs, investors should proceed with extreme caution” For more information on BDO’s Capital Markets services, please contact one of the regional leaders:

About the Survey
These findings are from The 2018 BDO IPO Outlook survey, a national telephone survey conducted by Market Measurement, Inc. on behalf of the Capital Markets Practice of BDO USA. Executive interviewers spoke directly to 100 capital markets executives at leading investment banks regarding the market for initial public offerings in the United States in the coming year. The survey, which took place in December of 2017, was conducted within a scientifically developed, pure random sample of the nation’s leading investment banks.

* Renaissance Capital is the source for all historical data related to the number, size and returns
of U.S. IPOs.]]>Mon, 08 Jan 2018 05:00:00 GMT8f7f7f23-ae75-4144-8e44-d6976ef40b83

Consistent with Chairman Clayton’s views on SEC policy-making, the SEC and staff are particularly focused on activities intended to facilitate capital formation.

The SEC staff is “open for business” and encourages registrants to contact them about questions and potential relief from reporting requirements that call for information that isn’t considered material to investors.

The SEC’s work continues on its Disclosure Effectiveness Initiative and we should expect further rulemaking and activities related to the initiative in 2018.

Keep going/get going. Successfully implementing the significantnew accounting standards (revenue, leases, and CECL) is top of mind for the SEC staff and should be for registrants as well.

Cybersecurity. Cyber threats and breaches are increasing at a rapid pace and registrants are highly encouraged to focus on their cybersecurity controls, procedures and disclosures.

The most significant tax reform since 1986 is upon us. A new tax code with different corporate tax rates will have substantial consequences on financial reporting and disclosures.

Our SEC Year in Review publication provides additional insight into these issues. It also summarizes other Commission rulemaking, staff activities and practice issues from the conference that affect financial reporting.

]]>Tue, 02 Jan 2018 05:00:00 GMT589485b1-863b-47bf-bc0f-4632e9e52ae2Summary
The enactment of the most significant U.S. income tax legislation in 30 years is now final.
On Friday, December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” legislation or the “Act.”

For U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS), the enactment date is December 22, 2017.

Under ASC 740, Income Taxes, reporting entities are required to recognize the effect(s) of the Act on current and deferred income taxes in the enactment period’s financial statements.

For calendar year reporting entities, the enactment period is the fourth quarter of the 2017 annual reporting period. For fiscal year reporting entities, the enactment period is the fiscal quarter within which the December 22 enactment date falls, e.g., second quarter for a June 30 fiscal year reporting entity.

Details

On the same date as the president signed the Act into law, the SEC staff issued guidance in the form of Staff Accounting Bulletin (SAB) No. 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effect(s) of the Act in the period of enactment.

1. SAB 118 outlines the approach companies may take if they determine that the necessary information is not available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effect(s) of the Act by the time the financial statements are required to be filed. Companies may use this approach when the timely determination of some or all of the income tax effect(s) from the Act is incomplete by the due date of the financial statements.

SAB 118 also prescribes disclosures that reporting entities must provide in these circumstances.

The guidance in SAB 118 is strictly limited to the financial reporting consequences from the Act and cannot be applied by analogy, nor used to comply with financial reporting of other tax legislation, e.g., a tax law change in a foreign country.

2. The framework provided in SAB 118 necessitates making a determination whether the assessment and quantification of a particular income tax effect(s) is “incomplete” by the due date of the financial statements.
Income tax effect(s) that are considered “complete” by the due date of the financial statements must be reported in the enactment period financial statements.

If the assessment and quantification of some or all of the income tax effect(s) are incomplete by the due date of the financial statements, a reporting entity should determine whether a “reasonable estimate” can be made.

A reporting entity must record a reasonable estimate in the first period in which it is possible to determine a reasonable estimate. Under SAB 118, reasonable estimates are considered “provisional amounts” that have to be updated when additional information becomes available and the evaluation and computation of the additional information is complete.

A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed one year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined.

Any income tax effect(s) that are unrelated to the Act cannot be treated nor reported as measurement period adjustments.

If a reasonable estimate (with respect to one or more items) cannot be made by the due date of the enactment period financial statements, a reporting entity should apply the provisions of ASC 740 to the item(s) by applying the tax law in effect prior to the enactment of the new tax law.

3. There are two illustrative examples in SAB 118.

Under Example 1, a reporting entity has historically asserted an indefinite reinvestment of foreign earnings and thus not provided in the financial statements a deferred tax liability for the latent U.S. tax effect. The passage of the Act now causes the entity to owe a U.S. tax at different rates on the undistributed accumulated earnings and profits. The entity concludes, based on its facts and circumstances, that it is unable to develop a reasonable estimate of the tax on accumulated foreign income by the due date of the financial statements which include the enactment period. In this fact pattern, the reporting entity does not recognize the effect of the final tax on accumulated foreign earnings in the financial statements which include the enactment period. Instead, the entity would recognize a reasonable estimate in a subsequent period if one can be determined and continue to revise it until final determination of the tax liability is complete. However, the measurement period cannot exceed 12 months from the enactment period.

Under a modified Example 1(a), the entity is able to determine and recognize a reasonable estimate of the tax liability in the financial statements which include the enactment period. In a subsequent period (within the measurement period), the entity obtains, analyzes and prepares the necessary information to complete the determination of the final tax and the accounting, resulting in an adjustment to the provisional amount.

Under Example 2, a reporting entity with deferred tax assets as of the enactment date is able determine the income tax rate remeasurement effect by the financial statements’ filing due date. However, the entity cannot determine a reasonable estimate of the valuation allowance impact that could arise due to certain provisions of the Act. In a subsequent period, the entity is able to obtain, analyze and prepare information that is necessary to complete the valuation allowance assessment, and thus is able to conclude the accounting and determine that no change in valuation allowance is required due to provisions of the Act.

SAB 118 states that reporting entities should provide financial statement disclosures about material impact(s) from the Act for which the ASC 740 accounting is incomplete, including:
(a) Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;
(b) Disclosures of items reported as provisional amounts;
(c) Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
(d) The reason why the initial accounting is incomplete;
(e) The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;
(f) The nature and amount of any measurement period adjustments recognized during the reporting period;
(g) The effect of measurement period adjustments on the effective tax rate; and
(h) When the accounting for the income tax effects of the Act has been completed.

5. A Foreign Private Issuer reporting under IFRS may apply the approach outlined in SAB 118 solely for the purpose of completing the income tax accounting for the effect(s) of the Act as required by International Accounting Standard (IAS) 12, Income Taxes.

The staff also issued a Compliance & Disclosure Interpretation, which confirms that the remeasurement of a deferred tax asset to incorporate the effects of newly enacted tax rates or other provisions of the Act does not trigger an obligation to file under Item 2.06 of Form 8-K.

BDO Insights

The issuance of SAB 118 is a significant development intended to assist reporting entities in complying with the requirements in ASC 740.

While SAB 118 indicates the measurement period may be up to 12-months (e.g., December 2017 to December 2018 for calendar year entities), reporting entities cannot wait to gather, assess and evaluate information and compute the necessary entries until the end of the measurement period. SAB 118 merely provides relief when the information needed to recognize some or all of the income tax effect(s) of the Act (and only this Act) is incomplete by the filing date.

We expect that a considerable information gathering and evaluation work may be required to determine whether a reasonable estimate with respect to one or more effect can be made by the due date of the financial statements. Reporting entities must make a reasonable effort and act in good faith to determine specific income tax effect(s) and complete the ASC 740 current and deferred tax accounting. This will require exercising sound professional judgment based on the particular facts and circumstances.

For example, a reporting entity whose accumulated foreign income has been considered permanently reinvested might be able to determine a reasonable estimate of the final tax on accumulated foreign income if it has few foreign subsidiaries, a simple legal entity reporting system, few differences between reported U.S. GAAP retained earnings and U.S. earnings and profits (a tax law measurement of income), and readily available foreign cash and cash equivalent information. The reporting entity might update the provisional amount and complete the ASC 740 accounting in a subsequent period as it is collects, evaluates, analyzes, and computes the impacts from foreign taxes paid on the accumulated income, foreign tax credits, foreign withholding tax, and the potential foreign currency translation effect on the final tax liability. The disclosures provided in the initial and subsequent periods would be consistent with the disclosure requirements in SAB 118.

Conversely, a reporting entity whose accumulated foreign income has been considered permanently reinvested for accounting might not initially be able to determine a reasonable estimate of the final foreign tax liability if it has many foreign subsidiaries, a very complex holding structure (e.g., divisional reporting, holding companies, etc.), significant differences between reported U.S. GAAP retained earnings and U.S. earnings and profits (e.g., material purchase price step-up and certain U.S. tax elections to amortize purchase price for earnings and profits), a complex foreign intercompany treasury structure, and a complex foreign tax reporting structure with many foreign tax returns. Under this circumstance, the reporting entity would comply with the ASC 740 requirements as if the tax law in effect prior December 22, 2017, continues to apply (i.e., it would continue to assert accumulated foreign income is permanently reinvested) until subsequent period(s) in which it is able to determine a reasonable estimate and/or the final tax liability and complete the ASC 740 accounting. The disclosures provided in the initial and subsequent periods would be consistent with the disclosure requirements in SAB 118.

Reporting entities must support and document their rationale for why some or all effects are incomplete, why reasonable estimates cannot be made, measurement period adjustments, and final determinations of provisional amounts. The level and extent of documentation will depend on the particular entity’s facts and circumstances. However, it is expected to be consistent with the level and extent of disclosures required under SAB 118.

]]>Thu, 21 Dec 2017 05:00:00 GMT98afe7d2-fc4a-4d38-8a56-16cbb032767fRevenue from Contracts with Customers (ASC 606), comes into effect for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that year. All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. BDO offers an example adoption timetable for companies to consider in planning their general approach to adopting the new standard.

Download
For more information, please contact one of the following practice leaders:

FASB ASU 2014-09, Revenue from Contracts with Customers (ASC 606), comes into effect for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that year. All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. BDO’s succinct practice aid will help companies navigate the tax implications of adopting ASC 606, Revenue from Contracts with Customers.

Companies in both the United States and abroad are racing toward the effective date of the new comprehensive revenue recognition standard, Revenue from Contracts with Customers.

ASC 606 is effective for public entities for annual reporting periods beginning after December 15, 2017 and one year later for private entities (i.e., 2018 and 2019, respectively). The new standard applies to all industries and all revenue transactions from contracts with customers.

The adoption of the new standard will impact pretax income and consequently taxable income of all entities. Tax departments need to understand the standard’s requirements and the impact it will have on pretax income and assets and liabilities related to revenue transactions from contracts with customers to accurately determine the current and deferred income tax impact.

The adoption of the new revenue standard will require making income tax related adjustments under ASC Topic 740 Income Tax (ASC 740) on the date of adoption. BDO’s comprehensive newsletter addresses those adjustments in depth.
For more information, please contact one of the following practice leaders:

]]>Thu, 14 Dec 2017 05:00:00 GMT5a99cc88-fbf6-4b9d-b4f2-7e6fbba40f58Financial Reporting Manual (FRM) on December 1. Like previous updates, the inside cover of the FRM lists a summary of the paragraphs that were updated. The updates include:

Revisions to guidance related to the impact of adopting new accounting standards on pro forma financial statements:[1]

If a registrant adopts a new accounting standard as of a different date or using a different transition method than a significant acquired business, the registrant should conform the adoption dates and transition methods of the acquired business to its own in the registrant’s pro forma financial statements that reflect the acquisition. The staff noted that it will consider requests for relief from this requirement.

If a registrant retrospectively adopts a new accounting standard at the beginning of its fiscal year, and later acquires a significant business for which pro forma financial statements are required, the pro forma income statement for the last completed fiscal year need not reflect the new accounting standard before it is reflected in the historical financial statements of the registrant. For example, if a calendar year end registrant adopts ASC 606 on January 1, 2018 using a full retrospective approach and acquires a significant business in September 2018, the registrant’s pro forma income statement for the year ending December 31, 2017 included in the registrant’s Form 8-K need not reflect the adoption of ASC 606.[2] However, registrants should make appropriate disclosure in the notes to the pro forma financial statements if the adoption of the new standard is expected to be material.

Revisions to address the adoption of new accounting standards when EGC status is lost:

An EGC may elect to use an extended transition period for complying with any new or revised accounting standards. If an EGC that makes this election loses its EGC status after it would have been required to adopt a new standard absent the extended transition period, the company should generally adopt the standard in its next filing after losing status. The staff expects that EGCs should plan appropriately to adopt new accounting standards if they have taken advantage of the extended transition period provision. However, the guidance also indicates that the staff may consider other alternatives upon the loss of EGC status depending on facts and circumstances.

Conforming and non-substantive revisions to Topic 11, Reporting Issues Related to the Adoption of New Accounting Standards

Conforming edits were made to address the guidance above and the issuance of ASU 2017-13 (which permits certain public business entities to adopt the new revenue and leasing standards using the effective dates applicable to private entities).[3]

[1] The updates are consistent with previously published guidance on how to think about the adoption of the new revenue standard (ASC 606) in the context of pro forma financial statements. However, the FRM update relocates and expands this guidance so that it now applies more broadly to all new accounting standards.

[2] This fact pattern assumes that the registrant has not already filed revised financial statements as of and for the year ending December 31, 2017 reflecting the adoption of the new accounting standard. A registrant that has already filed such financial statements reflecting the new accounting standard (e.g., on a Form 8-K or with a new or amended registration statement filed prior to the acquisition) would be required to reflect the new accounting standard in the pro forma income statement for the year ending December 31, 2017.

To the Point

A new PCAOB auditing standard and related amendments, approved by the SEC on October 23, 2017, addresses new required disclosures relative to Critical Audit Matters (CAMs), auditor tenure, and a statement on independence, among other changes to the auditor’s report.

Applies to audits of public companies – both large and small.1

BDO INSIGHT
The new PCAOB auditor reporting standard is the first significant change to the U.S. auditor’s report in over 70 years and follows the recent initiatives internationally to provide transparency into the audit.

Phasing In Requirements / For fiscal years ending on or after:

12/15/2017: Report format, tenure, and other information

6/30/2019: Communication of CAMs for audits of large accelerated filers

12/15/2020: Communication of CAMs for audits of all other filers1

Early adoption permitted after SEC approval of final standard on October 23, 2017.

The Auditor’s Report: Similar But Different

The PCAOB has spent seven years and addressed close to 500 comment letters from companies, audit firms, and investors in developing the new standard that provides additional information investors have been requesting without otherwise modifying the auditor’s opinion on the financial statements as a whole. The pass/ fail opinion, which investors value, is retained in the new standard.

BDO INSIGHT
Through comment letters and other forums - users of financial statements have emphasized the importance of retaining the pass fail opinion as essential to their decision making about a company. The result is now an auditor’s report that requires the opinion to be the first paragraph followed directly by the basis for opinion. The communication of Critical Audit Matters (CAMs), when applicable, would follow those sections.

Reporting Raises the Bar
While the “pass/fail” model is retained, the new report includes a revised format and enhanced disclosures, specifically audit tenure and required communication of CAMs.

Auditor’s Report as a Focus for Discussion with Audit Committees

While CAMs will result from the nature of communications that are already occurring with the audit committee, the auditor is now required to provide to and discuss with the audit committee a draft of the auditor’s report prior to release.

BDO INSIGHT
With the introduction of CAMs, the audit report will provide information that had not previously been provided to investors and its form and content remains the responsibility of the auditor. While the new standard requires the auditor to discuss the report, which would include the treatment of any sensitive information, with the audit committee prior to release, it is anticipated that communication with the audit committee regarding potential CAMs will occur throughout the audit.

Original Information – To Disclose or Not Disclose

When describing CAMs in the auditor’s report, the auditor is not expected to provide original information unless it is necessary to describe the principal considerations that led the auditor to determine that a matter is a CAMs or how the matter was addressed in the audit.

BDO INSIGHT
The expectation is that auditors will generally be able to adequately convey the principal considerations and how the auditor addressed them in describing a CAMs without including information that has not already been disclosed by management. However, in the rare instance where this is not the case, auditor reporting of original information would be limited to areas within the perspective of the auditor.

What May CAMs Look Like?

Companies following the International Standards on Auditing (ISAs) implemented changes similar to CAMs for years ended 12/15/2016. Early review of these, along with illustrative examples in the PCAOB’s initial proposal, may be helpful as companies and their auditors begin to assess reporting changes.

BDO INSIGHT
CAMs are expected to be unique to each company’s circumstance and as such should not reflect a boiler plate approach. Monitoring examples from earlier adoption of similar standards in the U.K. and Europe may be helpful in developing an approach for selecting those matters that rise to the level of a CAMs and how best to describe those matters.

Providing a More Tailored Approach

New auditor’s reporting may encourage…INNOVATION…in style, format and design.

1 AS 3101 excludes the communication of CAMs for audits of brokers and dealers; investment companies other than business development companies; employee stock purchase, savings, and similar plans; and emerging growth companies.

]]>Thu, 07 Dec 2017 05:00:00 GMT7398d681-cade-49ea-b729-f178fd6ae902
The comment letter relates to the proposed Accounting Standards Update (ASU), Codification Improvements. We generally agree with, and support finalizing, the ASU but have concerns about certain amendments as well as suggestions for improving them. We also identified additional technical corrections that we believe the Board should deliberate and expose for public comment as part of its ongoing Codification improvements project.

As evidenced in the fourth annual Audit Committee Transparency Barometer, public companies – small through large – continue to expand voluntary disclosures within their proxy statements to provide stakeholders with further insight into oversight responsibilities, particularly with regard to the external auditor.

Audit Committee Transparency Barometer and Key Findings
In November 2017, the Center for Audit Quality and Audit Analytics released their fourth annual Audit Committee Transparency Barometer, examining the robustness of audit committee proxy disclosures among the Standard & Poor’s (S&P) Composite 1500 companies. Unlike similar reports that focus on the largest public companies, this report looks at the most recent proxy statements through June 30, 2017 across small- mid-, and large-cap companies that compose the S&P 1500. The authors note that they continue to see encouraging trends with respect to voluntary, enhanced disclosure around external auditor oversight.

Within each of the above noted areas, the report provides several illustrative disclosures deemed as best practices for audit committee consideration.

Key Disclosure Findings:

Within the debrief of the above findings, the CAQ and Audit Analytics highlight the belief that many audit committees who annually perform assessments of the external auditor and provide constructive feedback to the audit team may not be disclosing such activity. The CAQ points to this as a potential opportunity for audit committees to not only enhance transparency but also to underscore improvements being made to audit quality and audit quality indicators.

Mounting Pressure for Increased Disclosures?
In an era marked with increasing demand for information and complexities surrounding such, there is noted significant regulatory emphasis around disclosure coupled with rising demands by shareholders and others for more transparency around corporate governance. With the exception of the Sarbanes-Oxley Act of 2002, however, significant regulatory requirements for audit committee disclosures have not changed. In 2015, the SEC put feelers out on possible revisions to audit committee disclosures. Since that time, the SEC has taken a monitoring approach of developments in practice but disclosure effectiveness remains a continual theme in publicly expressed statements by SEC leadership and staff.[1]

In 2017, new Chairman of the SEC Jay Clayton emphasized his desire to spur capital formation and review the accessibility and meaningfulness of increasing disclosure requirements of public companies. Many have suggested that the public company audit, designed to provide investor confidence that management is accurately portraying the financial reporting for their organizations, remains somewhat of a mystery. Further, with the recent SEC approval of the PCAOB’s new auditing standard to significantly enhance the auditor’s report, audit committees are pondering whether and how this may impact company disclosures in the public filings – particularly those disclosed by the audit committee.

BDO InsightsGiven complexities in transactions, increasing access to information, rapid pace of change – technology, economic, information, etc. - public demand for more transparency and understanding continues to rise. Regulators, while potentially trying to reduce an already overwhelming disclosure burden, remain focused on the balance for meaningful investor information and consideration of whether such should be mandated.

Those charged with governance can get ahead of the curve now and voluntarily incorporate more insightful disclosures in their public filings. This is a significant opportunity to provide timely and relevant information about the audit process and the related decision-making around this particular area of oversight. It further represents a means for a company to perhaps further differentiate itself from its peers and demonstrate focus on driving audit quality. The increasing illustrations highlighted in the Transparency Barometers may be a good starting point in determining where your organization currently may be positioned and how to further strengthen their disclosures in this area.

[1] For more on SEC Disclosure Effectiveness, refer to the SEC’s website.

]]>Wed, 29 Nov 2017 05:00:00 GMT0abf7a16-3e08-4940-9e40-cb23391b5803
BDO generally supports the FASB's proposed improvements to the recently issued standards on recognition and measurement of financial assets and liabilities (ASU 2016-01) and leases (ASU 2016-02). We believe that the proposal, together with our recommendations, would improve the standards.

]]>Tue, 14 Nov 2017 05:00:00 GMT897d85c3-fe28-46b6-8aa3-e863c1ed3132The SEC has approved the PCAOB’s final auditor reporting standard which will have staggered implementation that effects audits for fiscal years ending on or after December 15, 2017. While the pass/fail opinion has been retained, several significant changes to both format and required disclosures will necessitate increased attention by audit committees and management along with their auditors during the coming audit cycles.

What’s Changing?
On October 23, 2017 the SEC) approved the PCAOB’s new auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, as adopted by the PCAOB in June 2017. The SEC also approved related amendments to certain other PCAOB standards.

As noted in BDO’s prior Alert, the new standard and related amendments, which will replace portions of AS 3101, Reports on Audited Financial Statements, retain the pass/fail opinion in the existing auditor’s report, but significantly change the existing auditor’s report to include a discussion of “critical audit matters” (CAMs) that have been communicated to the audit committee, particularly those that involve especially challenging, subjective or complex auditor judgment. The new standard also requires disclosure of the auditor’s tenure (i.e., the year in which the auditor began serving consecutively as the company’s auditor) within the auditor’s report, and requires other formatting changes to the auditor’s report.

Which Audits Are Impacted and When?
The standard and amendments generally apply to audits conducted under PCAOB standards; however, communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans. Auditors of these entities may choose to voluntarily include CAMs in the audit report.

The final standard and amendments will take effect as follows:

New Auditor Reporting Provisions

Effective Date

Report format, tenure, and other information

Audits for fiscal years ending on or after December 15, 2017

Communication of CAMs for audits of large accelerated filers

Audits for fiscal years ending on or after June 30, 2019

Communication of CAMs for audits of all other companies

Audits for fiscal years ending on or after December 15, 2020

The PCAOB plans to do a post-implementation review of the new standard to make sure it is working as intended and does not lead to any unintended consequences. Consistent with the views set out in BDO’s comment letter to the SEC, the SEC Chairman Jay Clayton emphasized that, “The phased effective dates for CAMs should facilitate some early-stage analysis through the PCAOB’s Post-Implementation Review process, based on the experiences of large accelerated filers. Depending on the findings of this analysis, including an evaluation of unintended consequences, the board should be open to making changes, if necessary, to the revised auditing standards, including to the effective date for companies other than large accelerated filers.”

BDO will be providing updated guidance to our clients and contacts on evolving developments with respect to the new auditor’s reporting model in the form of thought leadership, infographics, examples, and educational opportunities through our Center for Corporate Governance and Financial Reporting.

We encourage audit committees and management to be engaging in robust dialogue about the changes required by AS 3101 and how this will impact current and subsequent years’ audits.
For more information, please contact one of the following practice leaders:

]]>Tue, 24 Oct 2017 04:00:00 GMTd88e0a33-8a95-4e9b-a347-3bb311a2e063Summary
On October 11th, the SEC proposed amendments to modernize and simplify certain disclosure requirements in Regulation S-K. The proposal would not make major changes to Regulation S-K. Rather, in Commissioner Piwowar’s words, the proposed amendments respond to the SEC’s mandate under the Fixing America’s Surface Transportation Act to “prune the regulatory orchard” – i.e., clear away the unnecessary or inconsequential to allow enhanced focus and attention on what is material to a filing. The amendments are based primarily on recommendations made in the staff’s November 2016 Report on Modernization and Simplification of Regulation S-K and are intended to update or streamline the disclosure framework while still providing investors with all material information required to make informed decisions.

Details

Among other things, the proposed amendments would revise:

S-K Item 303, Management’s Discussion and Analysis, to emphasize that the registrant focus its discussion of comparative periods on changes that are material to its financial condition and operations. The proposed amendments emphasize concepts in the SEC’s 2003 MD&A Interpretive Release, which encourages registrants to take a “fresh look” at previous periods. The proposal would permit registrants to omit the discussion of the earliest period presented if it is no longer material or of continuing relevance to an investor.

S-K Item 102, Description of Property, to replace references to “major” encumbrances and “materially important” physical properties with a materiality threshold. The proposal would require a description of property only if it is material to the registrant or its business. However, the proposed amendments would not apply to registrants in the mining, real estate, and oil and gas industries.

S-K Item 601, Exhibits, to permit registrants to redact confidential information from material contracts without first submitting a confidential treatment request to the SEC staff where such information is both not material and competitively harmful if publicly disclosed.

The proposal would also make changes to use technology to improve access to information.

Comments on the proposal are due within 60 days of being published within the Federal Register.
For questions related to matters discussed above, please contact:

Flurry of IPOs to Close Q3 Bodes Well for Strong Q4

Offerings, Proceeds and Filings Have Already Surpassed 2016 Totals

While the broader U.S. stock market has been a pillar of stability in 2017, consistently climbing upward with little volatility, the U.S. market for initial public offerings (IPOs) has resembled a rollercoaster ride. IPO activity started the year off at a crawl, before a frenzy of offerings priced in the Spring. That was followed by a very slow Summer, prior to a flurry of activity in late September as the calendar turned to Fall.

Despite the bumpy ride, the U.S. IPO market has rebounded well from a very disappointing year in 2016, as offering activity, proceeds and filings have each already surpassed last year’s full year totals.

Through September, there have been 106 IPOs that have raised $24.6 billion in proceeds on U.S. exchanges in 2017, representing increases of 41 percent and 107 percent respectively from Q3 totals of 2016. The 141 offering filings through the first nine months of the year also reflect a sizable (+41%) jump from a year ago. Through Q3, U.S. IPOs have averaged $232 million in size, more than 46 percent larger than a year ago.*

“When you consider the divisive politics in Washington, daily threats of nuclear war from North Korea and multiple natural disasters impacting various regions of the country, the strong performance of the U.S. stock market has been extremely impressive,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA. “Given that resiliency and the jump in offerings during the second half of September, there is every reason to believe that IPO activity can gain momentum in Q4 and complete a strong rebound from a difficult 2016.”

Industries

For the fifth consecutive year, the healthcare sector – with 32 IPOs - is leading all industries in the number of offerings brought to market. Biotech IPOs have been the key driver in healthcare and they should continue to propel offering activity moving forward.

The technology industry has the second most IPOs through Q3, but those 19 offerings are far below expectations. Many had hoped that 2017 was going to be the year that many of the tech “unicorns” (private companies valued at more than $1 billion) would leave their private stables for the open range of the public markets, but only a few made the trip.

Given the poor performance of the Snap and Blue Apron IPOs, each still trading below their offering price, there is renewed doubt about the valuations of these private Silicon Valley businesses, leading to a continued resistance to testing the public waters.

The financial (13), energy (13) and industrial (10) sectors are also strong contributors to this year’s IPO rebound. No other industry has reached double digits in offerings this year.

“For some time now, IPO market observers have been waiting for the technology sector to spring to life and assume its traditional place as the U.S. IPO leader. Unfortunately, every time activity begins to pick up, some poor debuts, most recently by Snap and Blue Apron, have caused other potential tech IPOs to postpone their offering plans,” said Lee Duran, Partner in the Private Equity Practice of BDO USA. “However, there have been successful technology offerings this year. Seattle-based, Redfin, the online real estate company, had a successful launch in late July and it continues to trade well above its offering price. More recently, Roku, the television streaming service, surged 90 percent on its initial two days of trading at the close of Q3. This type of performance is exactly what is needed to entice more of the Silicon Valley set to join the public markets.”

Q4 Forecast

As we enter the final quarter of 2017, the U.S. IPO market is heating up again. U.S. stock markets remain near all-time highs with very little volatility, making for an attractive market for new offerings. With filing activity picking up and a suspected strong backlog of confidential filers, the rebound that began last Spring looks to be starting up again as we enter Q4.

Positive market conditions that have been present throughout the year and the strong performance of offerings overall - the average IPO has delivered better than 20 percent return in 2017 - is likely to drive additional pricings through year-end.

The 2017 BDO IPO Outlook survey of leading investment bankers, released last January, predicted approximately 120 IPOs averaging $235 million in size on U.S. exchanges in 2017, which projected to more than $28 billion in proceeds. If the IPO market merely maintains its year-to-date performance through Q4, the Outlook’s forecast will be comfortably exceeded.

“Although the SEC’s decision to extend the JOBS Act’s confidential filing provision to all offering companies was a welcome move that should encourage more offerings, it also greatly reduces the visibility of the IPO pipeline,” said Jeff Jaramillo, SEC Practice Leader at BDO USA. “However, with 50 public filings in Q3 as a baseline, it is safe to assume that there is a healthy quantity of potential offering companies ready to move forward should the environment continue to remain favorable for IPOs.”

For more information on BDO’s Capital Markets services, please contact one of the regional leaders:

Table of Contents

Summary

In the aftermath of recent natural disasters including Hurricanes Harvey, Irma, and Maria, as well as earthquakes in Mexico, this FASB Flash Report is intended as a resource for the related financial reporting issues. These matters may impact third quarter interim reports for SEC registrants. The accounting guidance differs by the type of loss, but practitioners should bear in mind that the losses are generally reflected in the accounting period of the natural disaster, independent of any potential insurance proceeds, which are accounted for separately.

Details

Asset Impairment and Contingent Losses
As a result of natural disasters many assets may be destroyed, damaged or impaired. When considering if impairment exists, an entity should first determine the condition of the asset. If an asset is destroyed, it should be written off as an expense. Otherwise, an impairment may be required.

Receivables and Loans - Receivables and loans from entities impacted by natural disasters might be at risk for collectability. Receivables and loans are subject to ASC 310 and ASC 450-20. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, impairment can be measured based on a loan’s observable market price or the fair value of the underlying collateral.

Inventory - Under ASC 330-10-35, inventory measured using any method other than LIFO or the retail inventory method is carried at the lower of cost or net realizable value. When the net realizable value of inventory is lower than its cost, the inventory should be written down and recognized as a loss in earnings in the period in which it occurs. For inventory measured using LIFO or the retail method, an adjustment is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods will be less than cost, the difference is recognized as a loss of the current period.

Indefinite-lived Intangible Assets - Indefinite-lived intangible assets are addressed under ASC 350-30-35. They are tested for impairment annually, or more frequently if events or circumstances indicate the asset might be impaired, by comparing the fair value of the assets to their carrying amount. Alternatively, an entity may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative assessment described in ASC 350-30-35-19. Note, an indefinite-lived intangible asset is initially tested for impairment before a larger asset group that includes the intangible asset is assessed for recoverability.

Property, Plant and Equipment and Finite-Lived Intangibles - Property, plant and equipment held for use and finite-lived intangibles are subject to ASC 360-10. They are tested for recoverability whenever events or circumstances indicate that the carrying amount of the asset group may not be recoverable. If the asset group is not recoverable, its carrying amount is reduced to its fair value.

Alternatively, if an entity concludes that it will sell long-lived assets and the “held for sale” criteria are met, a loss should be recognized for a write-down of the disposal group to fair value less costs to sell.

Goodwill - Goodwill is subject to ASC 350. It is tested for impairment at the reporting unit level at least annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When the carrying amount of a reporting unit is less than its fair value, the implied fair value of goodwill must be calculated to determine the amount of goodwill impairment, if any. Similar to indefinite- lived intangibles, an entity could choose to first perform a qualitative assessment to determine whether a quantitative assessment is needed. Goodwill is tested for impairment only after indefinite-lived intangible assets and amortizing assets, such as PP&E, have been assessed. Private companies currently have an option to elect a simplified method of accounting for goodwill. In addition, the amendments in ASU 2017-04, Simplifying the Test for Goodwill Impairment should be applied when effective, which is periods beginning after December 15, 2019 for public companies.[1] ASU 2017-04 may be early adopted. For additional information on ASU 2014-04 see BDO’s Flash Report here.

Contingent Losses - Liabilities related to natural disasters are addressed by ASC 450-20, in the absence of other GAAP (see discussion of “Exit Activities” below). A liability should be accrued by a charge to income if it is probable that it has been incurred at the financial statement date and the amount of the loss can be reasonably estimated. This includes, for example, the costs of repairs and maintenance that are not capitalized.

Exit Activities - Following a natural disaster an entity may choose to sell or terminate a line of business, close the business activities in a particular location, relocate the business activities from one location to another, make changes in the management structure, or undergo a fundamental reorganization that affects the nature and focus of operations. All of these items represent exit activities accounted for under ASC 420, Exit and Disposal Cost Obligations. These costs include:

Involuntary employee termination benefits pursuant to a one-time benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract.

Costs to terminate a contract that is not a lease.

Other associated costs, including costs to consolidate or close facilities and relocate employees.

A liability for a cost associated with an exit or disposal activity is recognized at fair value in the period in which the liability is incurred, (except for a liability for one-time employee termination benefits that are incurred over time). If fair value cannot be reasonably estimated, the liability is recognized in the period in which fair value can be reasonably estimated.

A liability for costs that will continue to be incurred under an operating lease for its remaining term without economic benefit is recognized at the cease-use date.[2]

Temporary Differences and Deferred Income Tax Liabilities - Book recognition of reserves, accruals and impairments would likely impact the measurement of temporary differences and related deferred income taxes under ASC 740. Careful consideration of deferred income taxes including the valuation allowance is required in the period that book losses, reserves and impairments are recognized. The only exception is the impairment of nondeductible goodwill for which no deferred tax effect should be recognized. For income tax purposes, uncollectible receivables can be deducted when they are considered “worthless”. The worthlessness of a debt is a question of fact. Obsolete inventory can be deducted when it is no longer able to be used or sold in a “normal” manner and it is being disposed of through a liquidator or junkyard, a donation or it is destroyed.

Balance Sheet Presentation - Asset impairments and liabilities related to natural disasters should be recognized independent of any related insurance recoveries. Liabilities are usually shown gross. This is because the conditions for netting the liabilities against an insurance receivable under ASC 210-20 are not typically satisfied as the insurance receivable and claim liability are with different counterparties.

Income Statement Presentation - ASC 225-20-45-16 states a material event or transaction that an entity considers unusual, infrequent or both is reported as a separate component of income from continuing operations. The nature and financial effects of each event or transaction is presented separately or disclosed in notes to the financial statements. Gains or losses of a similar nature that are not individually material are aggregated.

Losses from natural disasters that are unusual, infrequent or both, should be reported as a component of income from continuing operations on the statement of operations or disclosed in the footnotes.

Generally, a loss and the related insurance recovery may be presented in the same line item, as limited specific classification guidance exists for these items.

Involuntary Conversions
An involuntary conversion is the exchange, or conversion, of a nonmonetary asset (e.g., fixed assets) to monetary assets such as insurance proceeds. To the extent the cost of a nonmonetary asset is less than the amount of monetary assets received, the transaction results in a gain.[3] This is true even if the insurance proceeds are reinvested in replacement nonmonetary assets, such as new equipment.

In some cases, a nonmonetary asset may be destroyed or damaged in one accounting period and the amount of monetary assets to be received is not determinable until a subsequent accounting period. In those cases, any gain is recognized in accordance with the contingent gain guidance in ASC 450-30. Specifically, the gain should be recognized when all uncertainties have been resolved (typically when cash is received), at which point it is considered realizable. However, if the insurance recovery is determinable, such as when the insurance company does not dispute the claim, a recovery equal to the amount of the loss should be recognized when its receipt is considered probable.

Example - Assume that flooding caused physical damage to property and equipment. The damage to the equipment, having a carrying value of $1,000, was complete. The property was partially damaged; the portion of the building declared uninhabitable had an allocated carrying value of $5,000. There is insurance in place which will cover the cost to replace the equipment and repair the building, where the carrier has confirmed coverage of the claim and it is not being disputed by the insurance company. The estimated cost to do both is $10,000.

The company would record an impairment loss of $6,000 (and reduce its recorded balance of property and equipment) in the period of the flood. Further, the company would record an insurance recovery of $6,000 to reflect the proceeds from the insurance coverage to the extent of the asset write-off because recovery of that amount is considered probable in the circumstances. In the period the new equipment is purchased and repairs are made to the property, the company would record capital additions of $10,000. Additionally, in the period the company receives the incremental $4,000 of proceeds from the insurance coverage, it would record a gain on the involuntary conversion of that amount. Note that if the insurance company in this example denied or contested coverage, it may be inappropriate for the company to record any benefit of the coverage until such time that all uncertainties surrounding the extent of coverage is resolved – usually at the time cash is received from the insurance company.

Insurance Proceeds
As mentioned previously, impairment losses are generally accounted for separate from any related insurance. With respect to accounting for insurance proceeds, GAAP includes the following guidance.

Business Interruption - Natural disasters often cause disruptions in operations which result in losses. These losses are often covered by business interruption insurance and should be accounted for separate from other insurance proceeds. ASC 225-30 covers the presentation of business interruption insurance and defines business interruption insurance as “insurance that provides coverage if business operations are suspended due to the loss of use of property and equipment resulting from a covered cause of loss. Business interruption insurance coverage generally provides for reimbursement of certain costs and losses incurred during the reasonable period required to rebuild, repair, or replace the damaged property.”

When losses incurred can be reasonably estimated and recovery is considered probable a receivable may be recorded. However, the amount recorded should not be greater than costs incurred to date. Therefore, proceeds for lost profits are treated as a contingent gain and typically recorded at the settlement date.

If business interruption insurance is received, entities may elect a policy for how such amounts are presented in the income statement as long as it does not conflict with other applicable GAAP.

In connection with business interruption insurance proceeds, the notes to the financial statements should disclose the nature of the event resulting in business interruption losses and the aggregate amount of business interruption insurance recoveries recognized during the period and the line items in the income statement in which those recoveries are classified.

Property and Casualty - The cash flow presentation of property insurance proceeds covering damage or loss depends on the nature of the property. For example, insurance proceeds received in connection with leased property would be classified as operating cash flows for an operating lease or as investing cash flows for a capital lease.

Cash Flow Statement Presentation - Since insurance proceeds are classified based on the nature of the insurance coverage rather than the intended use of the proceeds, amounts received for business interruption, inventory losses and operating lease assets are presented as operating activities. If insurance proceeds are received for the loss of property, plant and equipment, they should be presented as investing cash flows.

In addition, when cash proceeds from insurance are significant, SEC registrants should disclose where the proceeds are classified in the statement of cash flows and discuss the insurance proceeds or settlements in MD&A. The discussion should include a description of the proceeds or settlement, why it was received, planned use for the receipts and any impact to reported earnings.

Derivative and Hedge Accounting
A key requirement for obtaining cash flow hedge accounting is that the hedged forecasted transaction is probable of occurring. Natural disasters can affect operations, causing some transactions to be curtailed, delayed or canceled. Companies that have designated forecasted transactions in cash flow hedging relationships e.g., purchases or sales of goods, or interest payments on debt, may determine that the hedged transaction is no longer probable of occurring within the originally specified time period, in which case hedge accounting should be discontinued prospectively. However, the related gains and losses in accumulated other comprehensive income should be reclassified in earnings only if it is probable that the forecasted transaction will not occur by the end of the period originally specified or within an additional two-month period thereafter. Reclassification of gains and losses would also affect deferred income tax accounting and intraperiod allocation under subtopic 740-20.

Natural disasters also may affect the eligibility for the “normal purchases and normal sales” scope exception to derivatives accounting for commodity contracts e.g., oil and gas. This exception is based on physical delivery and if that is no longer probable due to curtailment or cancelation of operations such that the contract instead would now settle net, the eligibility for applying this scope exception would no longer be met. Consequently, the contract should be recorded on the balance sheet at its current fair value and subsequently continue to be marked to fair value, similar to any other derivative.

Other Accounting Considerations
Natural disasters affect many aspects of a business. Additional consideration should be given to items such as debt, investments (including debt and equity securities, equity and cost method investments and investments in joint ventures), going concern, subsequent events, environmental remediation obligations, fair value estimates, and stock compensation.

In addition, entities should disclose the material event or transaction that gave rise to an unusual or infrequent loss, as described in ASC 225-20-45-16. Entities should also consider disclosures about risks and uncertainties in ASC 275-10-50. Further, natural disasters may trigger incremental disclosures for SEC reporting purposes.

[1] A public business entity that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.

[2] Upon the adoption of ASC 842, the right-of-use asset will be evaluated for impairment under ASC 360.

Summary

The SEC recently adopted interpretive guidance to assist companies in their efforts to make the pay ratio disclosures mandated by the Dodd-Frank Act.[1] The pay ratio rule requires issuers to disclose 1) the median annual total compensation of all employees, except the chief executive officer, 2) the annual total compensation of the CEO, and 3) the ratio of those two amounts in any annual report, proxy, or registration statement that requires disclosure of executive compensation pursuant to Item 402 of Regulation S-K. The rule is effective for issuers with fiscal years beginning on or after January 1, 2017, which means that issuers will begin making the pay ratio disclosures in early 2018.

Details

As the pay ratio rule permits the use of estimates, assumptions and statistical sampling to determine the median employee, some constituents expressed concern about the compliance uncertainty and potential liability associated with the required disclosures. The SEC’s interpretive guidance was partly issued to alleviate these concerns and states that the Commission will not take an enforcement action that challenges a registrant’s pay ratio disclosures if the estimates have a reasonable basis and are made in good faith. The interpretive guidance also clarifies that:

The consistently applied compensation measure used to calculate the median employee may be derived from existing internal, such as tax or payroll, records even if those records do not include every element of compensation, for example, equity awards.

The determination of workers that meet the definition of an employee may be drawn from pre-existing published guidance under employment or tax laws.

The staff updated its compliance and disclosure interpretations to reflect the Commission guidance above and issued separate interpretive guidance to help registrants understand how they can utilize statistical sampling and estimates in making their pay ratio disclosures. The guidance provides hypothetical examples related to the use of sampling and other reasonable methodologies.
For questions related to matters discussed above, please contact:

]]>Fri, 06 Oct 2017 04:00:00 GMT8ef4db1b-2ff1-4771-ba0a-89b200a39b41Topic 606, Revenue from Contracts with Customers - Exploring Transition Methods
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), comes into effect for public business entities (PBE) for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Therefore, a calendar year-end public entity will reflect the new standard in its first quarter ending March 31, 2018, each subsequent quarter, and also in the year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.

]]>Thu, 05 Oct 2017 04:00:00 GMT9c901113-0304-4ea8-abf2-cfe3e3218fc5SEC Issues Updates to Reflect New Revenue Recognition Standard
On August 18, 2017, the SEC staff released Staff Accounting Bulletin (SAB) No. 116 to conform its staff guidance on revenue recognition with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. SAB No. 116 states that SAB Topic 13, Revenue Recognition, and SAB Topic 8, Retail Companies, are no longer applicable once a registrant adopts ASC Topic 606. It also modifies Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure, to clarify that revenues from operating-differential subsidies[1] presented under a revenue caption should be presented separately from revenue from contracts with customers accounted for under ASC Topic 606 or as a credit in the costs and expenses section of the statement of comprehensive income. Prior to adoption of ASC Topic 606, registrants should continue to refer to prior SEC guidance on revenue recognition topics.

The SEC also issued two releases to update its interpretive guidance on revenue recognition:

Release No. 33-10402, Commission Guidance Regarding Revenue Recognition for Bill-and-Hold Arrangements, states that upon adoption of ASC Topic 606, registrants should no longer rely on the bill-and-hold arrangement guidance in Release No. 23507 and Accounting and Auditing Enforcement Release (AAER) No. 108, In the Matter of Stewart Parness, because ASC Topic 606 provides specific guidance on recognizing revenue for those arrangements. Until a registrant adopts ASC Topic 606, it should continue to refer to the guidance in Release No. 23507 and AAER No. 108.

[1] Revenues representing operating-differential subsidies under the Merchant Marine Act of 1936, as amended. Operating-differential subsidy is a payment made by the federal government to the owner-operator of a qualified American flag vessel to cover certain costs.

]]>Mon, 02 Oct 2017 04:00:00 GMT5e6b0ae8-bd4e-470a-83c6-a867b9bb9fbd
BDO supports the Board's intention to monitor the implementation of critical audit matters, as we believe such monitoring will be critical to successful implementation.

Summary

The PCAOB will continue to select the majority of issuer audits for inspection review on a risk-weighted basis – focusing on audit work on the most challenging areas, including financial statement accounts and disclosures requiring the highest degree of management judgment. Key areas of inspection focus continue to stem from recurring audit deficiencies, recent economic developments, and areas of significant judgment. Additionally, new accounting and auditing standards, multinational audits, and audit firms’ use of information technology and systems of quality control make the list as well.

Details

Timing and Population
The PCOAB has issued its August 2017 Staff Inspection Brief detailing information about the upcoming 2017 PCOAB inspections of registered audit firms.

Key Areas of Inspection Focus in 2017 Recurring audit deficiencies will again be key areas of focus this year including assessing and responding to risks of material misstatement, auditing accounting estimates, and internal control over financial reporting. While some corporations continue to argue that requirements from Sarbanes-Oxley Section 404(b) come at significant cost without perceived benefit, a study in the current issue of Auditing: A Journal of Practice & Theory provides statistical data correlating internal control environments with identified material weaknesses with significantly higher fraud risk than is found in the general population.

Recent economic developments are garnering attention from the PCAOB and this may include M&A activity, international events such as Brexit, investments in higher risk instruments, fluctuations in oil and natural gas prices, and other industry specific risk factors.

Areas of significant judgement continue to represent more challenging audit areas and generally greater risk, including considerations related to going concern analyses and income tax disclosures.

New accounting standardsand new reporting requirements this year include the hot topics of FASB issued guidance on revenue recognition and lease accounting in addition to the newly enacted PCAOB audit rules requiring public auditor disclosures on Form AP. While the revenue and lease accounting guidance is not yet effective, audit firms can expect to answer questions on how they are assessing the readiness of their issuer clients’ plans for addressing and reporting on the pending accounting changes.

Audit firms themselves will attract PCAOB reviews for multinational audits, use of information technology, and audit firm systems of quality control. In today’s environment, firms are challenged to facilitate transparency and opine on the integrity of financial statements while managing similar external and competitive risk factors as issuers. The PCAOB has expressed it is particularly interested in firms’ software audit tools, consideration of cybersecurity risk, and systems of quality control including: root cause analysis, independence, engagement quality reviews, and professional skepticism.

The Staff Inspection Brief also includes an appendix that contains historical data related to inspections of registered firms. This data indicates that revenues, receivables, non-financial assets, financial instruments, inventory, income taxes, and equity transactions as the most frequently inspected areas due to both materiality and risk.

Explore the 2017 BDO Cyber Governance Survey:

As the governance needs of corporate America continue to grow and diversify, directors at publicly traded companies are constantly being asked to do more. In recent years, perhaps no area of board responsibility has grown faster than the oversight of an organization’s cybersecurity.

The BDO Cyber Governance Survey, conducted annually by the Corporate Governance Practice of BDO USA, was created to act as a barometer to measure the involvement of public company directors in cyber-risk management. The 2017 BDO Cyber Governance Survey, conducted in August of 2017, examines the opinions of 140 corporate directors of public company boards with revenues ranging from $250 million
to more than $1 billion. “Earlier this year, a group of U.S. Senators introduced legislation - the Cybersecurity Disclosure Act of 2017 – intended to promote transparency in the oversight of cybersecurity risks at publicly traded companies. The bill would require that annual reports to the SEC must disclose the level of cybersecurity expertise of the board; or, if none exists, what other steps the reporting company has taken to address cybersecurity. The bill is just the latest salvo from legislators, regulators and good governance advocates in the ever-expanding cyber-war,” said Gregory A. Garrett, Leader of International Cybersecurity at BDO USA. “For the past four years, BDO USA has surveyed public company board members on their role in planning for and mitigating cyber-attacks at their companies. The annual survey has documented the continued ascension of cybersecurity in corporate boardrooms, as directors are being briefed more often and are responding with increased budgets to address this critical area. It also suggests where boards may need to better focus their efforts.”

Cyber-Risk Management

According to the 2017 BDO Cyber Governance Survey, more than three-quarters (79%) of public company directors report their board is more involved with cybersecurity than it was 12 months ago. A similar percentage (78%) say they have increased company investments during the past year to defend against cyber-attacks, with an average budget expansion of 19 percent. This is the fourth consecutive year that board members have reported increases in time and dollars devoted to cybersecurity.

Almost one in five (18%) board members indicate that their company experienced a cyber-breach during the past two years, a percentage very similar to the previous two years (22%).

A majority (61%) of corporate directors say their company has a cyber-breach/incident response plan in place, compared to less than a fifth (16%) who do not have a plan, and close to one-quarter (23%) who are not sure whether they have such a plan. Those with plans represent approximately the same percentage as a year ago (63%), but reflect a major improvement from 2015, when less than half (45%) of directors reported having one.“When considering the responses of board members regarding whether their company has experienced a cyber-breach, it is important to note that many companies do not report their breaches and, in other instances, businesses can be unaware they have been hacked. Given those realities, we view this particular finding as generally appearing lower than reality,” said Eric Chuang, Managing Director of Cyber Incident Response at BDO USA. “The continuing year-over-year increases in board involvement and investments in cybersecurity is extremely positive, but the percentage of businesses with breach response plans in place – although much improved from two years ago – is still far below where it needs to be.”

BDO FOOD FOR THOUGHT

Earlier in 2017, an Executive Order signed by President Trump outlined a very specific call to action to safeguard the critical cyber infrastructure of the U.S. government, sending a powerful message that cyber risk management is, and should be, of utmost importance to all organizations. As cybersecurity is rightly elevated to those charged with governance, BDO continues to explore various aspects of board-level risk management efforts that directors should keep top of mind, including:

Briefing Frequency

Close to four-fifths (79%) of public company board members report that their board is more involved with cybersecurity than it was 12 months ago. The vast majority of directors (91%) are briefed on cybersecurity at least once a year – this includes more than a quarter (28%) that are briefed quarterly, and better than one-fifth that are briefed twice a year (21%). The balance are briefed annually (36%) or more often than quarterly (6%).

Surprisingly, nine percent of board members say they are not briefed at all on cybersecurity. However, during the four years BDO has conducted this survey, the percentage of directors reporting no cybersecurity briefings has dropped consistently (see chart to the right).

Lack of Sharing on Cyber-Attacks

Despite this positive progress, the survey also found that businesses still fail to share information on cyber-attacks with entities outside of their company.

Sharing information gleaned from cyber-attacks with external entities is a practice that needs to become more prevalent for the safety of critical infrastructure and national security. The U.S. government has communicated ways in which businesses can contact relevant federal agencies about cyber incidents.

Unfortunately, when asked whether they share information they gather from cyber-attacks, only one-quarter (25%) of directors – virtually unchanged from 2016 (27%) - say they share the information externally. A similar proportion (24%) say they do not share the information with anyone and approximately half (51%) are not sure whether they do or not.

Of those sharing information on their cyber-attacks, the vast majority (86%) share with government agencies (FBI, Department of Homeland Security (DHS)) and close to half (47%) share with ISAC (Information Sharing & Analysis Centers). Very few (8%) share with competitors.

“For the second consecutive year, the survey reveals a continued vulnerability in cybersecurity – the ongoing failure of companies to share information they’ve gathered from cyber-attacks with federal agencies, ISACs, or competitors,” said John Riggi, Managing Director of Cybersecurity and Financial Crimes at BDO USA. “Sharing information gleaned from cyber-attacks is a key to defeating hackers, yet just one-quarter of directors say their company is sharing that information externally. This behavior needs to change if corporate America is to prevail in the cyber wars.”

BDO FOOD FOR THOUGHT

In certain situations, concerning cybersecurity, the FBI and DHS could truly be viewed as a corporate director’s two best friends. Relationships with law enforcement and other key advisors should be cultivated before they are needed in order to avoid or mitigate a cyber breach. Information-sharing (e.g., critical intelligence provided before disaster strikes) can help companies better protect themselves from costly attacks that can cause major disruptions to their business, and seriously undermine relationships and a company’s reputation.

Ransomware

Earlier this year, the “Wanna Cry” cyber-attack, which impacted businesses in more than 150 countries, greatly raised awareness of the threat posed by ransomware. When asked whether their company had taken steps to minimize its vulnerability to ransomware, a majority (60%) indicate they are addressing this threat.

Of those targeting ransomware vulnerabilities, a majority (58%) are placing an increased emphasis on patch management and increasing the frequency of data back-ups (58%). Close to half (46%) say they have increased their ability to restore data faster.

“This year’s study indicates that most boards are aware of the rising threat of ransomware and they are taking steps to proactively address this risk,” said Gregory Garrett. “Given the significant threat posed by ransomware, it is important that the sizeable minority of board members who say they have yet to take steps to minimize their vulnerability to this risk, do so as soon as possible.”